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Tax bill: Some realtors see cooling off, not collapse, of high-end home market

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Agents in California and northeast predict tax bill won’t stop steady sales of expensive residential real estate

A waterfront estate sits on the shores of Indian Harbor in Greenwich, Connecticut, one of the wealthiest towns in the United States.

One morning soon after the tax reform package passed in Congress, Inger Stringfellow, an agent with William Pitt Sotheby’s International Real Estate in New Canaan, Connecticut, was already sorting through the impact. She arrived at the office with messages from a handful of past and present customers, anxious about the impact of the new tax bill.

“I don’t think any of us have a crystal ball,” she says. “I wish I had a definitive answer.”

Stringfellow, who specializes in high-end midcentury modern homes in one of the wealthiest enclaves in the country, understands the anxiety and apprehension.

Changes in the massive tax bill, including capping the state and local tax deduction and lowering the cap on the mortgage-interest deduction (MID), have caused many to worry about its big impact on high-end real estate, especially in high-tax coastal and urban markets. According to senior economist Joseph Kirchner, in the long term, the mortgage interest rate deduction (MID) limitation will affect only 1.3 percent of homeowners nationally, but those will be concentrated in large, high-cost metros.

The long lines around the country of homeowners waiting to prepay local property taxes in an attempt to take advantage of sunsetting deductions highlight rising fear.

After prices have mostly recovered from the recession, are high-end markets in for a big price correction?

In interviews this week, Stringfellow and many of her colleagues in the high-end real estate marketplace don’t seem to be buying the worst-case scenarios. While the full impact of the bill—and its effect on home prices—is still coming into focus, many in the high-end real estate market feel that even with tax burdens rising and home values sure to drop, the market will see a dampening of energy and exuberance instead of the huge hit some have predicted.

“Now the uncertainty is gone and the tax bill provisions directly affecting these homes if far less onerous than expected,” says Kirchner. “Over the next few months, we expect these buyers to come back into the market.”

Richard Haggerty, CEO of the Hudson Gateway Association of Realtors, which operates in regions of New York state like Westchester County and Manhattan, believes initial shock and awe—the National Association of Realtors had predicted at least a 10 percent property devaluation across the board—has given way, after changes to the final bill, to expectations of a mere “softening” of the market. And to him, that’s actually a great result.

“Irrational exuberance is my great fear, and we haven’t seen that since the early 2000s,” he says. “It’s just been slow and steady.”

For Haggerty, who sells property in markets where a million-dollar listing isn’t really that expensive, dampening momentum may not be a terrible thing. His biggest issue is low inventory, an issue where he sees no end in sight. During the last half of 2016, he saw solid sales, though not exceptional.

Like others, he believes the truly high-end market won’t suffer. While the tax reform will add more to the housing costs and tax burdens of high-end owners, they’ll recoup plenty from cuts to their income taxes.

Christopher Dyson, an agent with The Agency in Los Angeles and a cofounder of the Pocket Listing Service, also believes the high-end market will stay relatively unaffected. Buyers and sellers working within the $3 to $8 million property range will feel the tax bill’s impact more, but the high end will “probably hold.” Like Haggerty, he’s preaching a slow-and-steady mantra.

“I just had a client who bought a $2 million home and said that while the new tax burden isn’t ideal, he’ll figure it out,” says Dyson. “The demand to own a piece of Southern California is hopefully not going away.”

Back in the northeast, Jaime Sneddon, an Associate Broker for Sotheby’s International Realty in Connecticut, believes tax reform will help certain markets play the pricing game. He believes that he’ll be able to lure buyers considering New York and New Jersey to consider Fairfield County, Connecticut, since property taxes are nearly half as much in that state. Due to tax reform, he’s launching an aggressive campaign to target potential buyers leaving New York City.

“I expect my business to soar over the next year because if you want to live near New York City, there are only three options, New York, New Jersey, and Connecticut,” he says. “The latter has now become the obvious choice.”

According to Trulia’s chief economist, Ralph McLaughlin, the bill’s real impact may be felt at a local government level. City and state officials are already looking at ways to lower the tax burden for their constituents. Certain specific groups of homeowners, like retirees on a fixed-income in high-tax areas, will really feel the hit when their bills skyrocket.

Where Tax Reform May Hit Sellers the Hardest

Housing market Percent of listings over $833,000 Mean listing price
Housing market Percent of listings over $833,000 Mean listing price
San Francisco-Redwood City-South San Francisco, CA 83.70% $2,779,125
San Jose-Sunnyvale-Santa Clara, CA 62.60% $1,835,572
Anaheim-Santa Ana-Irvine, CA 55.60% $1,682,708
Los Angeles-Long Beach-Glendale, CA 45.20% $1,764,228
Oxnard-Thousand Oaks-Ventura, CA 44.10% $1,265,972
San Diego-Carlsbad, CA 40.10% $1,268,149
Oakland-Hayward-Berkeley, CA 37.60% $1,037,191
Bridgeport-Stamford-Norwalk, CT 37.20% $1,192,437
Urban Honolulu, HI 35.90% $1,145,775
Nassau County-Suffolk County, NY 35.60% $1,438,182
Seattle-Bellevue-Everett, WA 30.70% $924,423
New York-Jersey City-White Plains, NY-NJ 30.50% $1,200,665
Cambridge-Newton-Framingham, MA 28.40% $859,669
Boston, MA 27.90% $938,770
Miami-Miami Beach-Kendall, FL 25.10% $972,480

“Some have said the sky will fall come tax season in 2018, but I don’t think there’s going to be any major impact on the market,” says McLaughlin. “There’s a big difference between cooling off and a collapse.”

The bill’s net benefits to wealthy households is the key metric, McLaughlin says. Though the tax-related benefits of owning and buying property will decrease, the tax plan will leave more money in the pockets of those high-income households, who may not be any worse off than they were before. Some may even be better off.

The real demographic that’ll feel more pain are those requiring a mortgage of over $750,000 or more, since that’s the new cap for the mortgage-interest tax deduction. Using homes worth $833,000 or a more as a cutoff (based on a roughly 11 percent down payment, they’ll require mortgages of $750,000 or greater), McLaughlin examined current Trulia listings data and found the impact will be concentrated in markets in coastal California; Honolulu, Hawaii; Long Island, New York; and Bridgeport, Connecticut.

Long-term, McLaughlin says, the bill’s true impact depends on how homeowners in these markets zero-out: If the overall tax benefit doesn’t outweigh the property tax hit, we may see homeowner action over the next few years, perhaps even referendums against property taxes.

“The second quarter is where you’ll really see the real impact,” says Haggerty. “My hope is that we’ll see some real stability.”