The proposed cutback to the mortgage interest deduction (MID) scares me. My concerns start with the effect on real estate, not just in the Santa Ynez Valley, but in the state of California and potentially throughout the nation. Paring back the MID from interest on $1.1M to interest on $500k while increasing the standard deduction, eliminates the financial incentive to purchase a home. The tax benefit to buy a home worth $300k is gone. The standard deduction will provide a lower tax basis. That price point is common throughout the country, not so much in California, though. The purchase of a $600k home which is common n California, will provide only a minimal tax benefit.The incentive to buy an entry level home in California is diminishing. Homeowners wanting to move up are truly losing out. They will have no improvement in tax benefits when moving up to a home with a $1M loan. It appears that incentives to purchase a home are disappearing. If the tax reform allows for the standard deduction to adjust for cost of living increases, the benefit of the MID could completely disappear in ten years.
If these assumptions are right, it appears that the rate of home ownership will go down. This translates to less people having skin in the game. That means less people having a financial commitment to our social structure. This could be another facet for social unrest.
Bear with me on the explanation why this isn't going to happen. If this were a zero-sum game, these changes to the tax code would generate a significant hit to the value of real estate and create significant social effects. Focusing on economics, taking away the incentives will cut the demand. To add balance to the supply side of the equation, prices will decrease. Furthermore, the housing affordability index in California has dropped to 28%. Few people can afford to buy a home in California even before this tax reform is implemented.
Is the sky falling? I truly believe everything I've stated here, but... What is going on with our stock market? It's going through the roof. Is that the sign of a bubble? I don't think so. These increases in the stock exchanges are based on the tax advantages that will result from the currently proposed tax reform. Some may think the corporate world is getting rich, but there is so much more to it than that. The investors are making money. Jobs will be increasing and pay scales will go up to compensate for the demand of skilled workers. This appears to be a beginning of a bullish business cycle. If that is the case, the proposed tax reform will boost the economy and subsequently, government tax receipts. In a good business cycle, real estate will perform equally as well.
In the midst of all this doom and gloom due to the significant reduction of the MID benefit, there appears to be a silver lining. Tax reform looks like it will provide a large boost to the economy which will benefit all; businesses, individuals, the national debt, and of course, real estate. For the same reasons the sky might be falling, it is likely to be the change that provides a big boost to the nation by putting the money in the pockets of the people that drive the economy and want to improve their standard of living and buy an entry level home or to move up in the world. This period of turmoil is looking like an opportunity to take advantage of start of a strong real estate market rather than a death blow to real estate.
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Now for the Santa Ynez Valley real estate: The November 29th caravan in Santa Ynez was a yawner. The holiday season tends to be a bit slow, but there were two properties worth mentioning. 2939 Quail Valley Road is a one acre property with considerable views and a pool. It has just come on the market and is listed at $949,000. The other property that I noticed was in Solvang on 264 3rd Street. At $675,000, this was a nice little 3 bedroom/3 bath charmer located close to the center of town.
For more information, please visit us at Central Coast Landmark Properties.