Why hasn't SD real estate prices fallen off a cliff yet?

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Submitted by flu on March 22, 2018 - 9:59am

I thought with the loss of SALT deductions and rising rates, home prices were suppose to fall off a cliff...

Submitted by spdrun on March 22, 2018 - 10:12am.

Hasn't even been 3 months since rates and SALT hit the fan.

Submitted by flu on March 22, 2018 - 10:22am.

spdrun wrote:
Hasn't even been 3 months since rates and SALT hit the fan.

cool. I'll ask the same question in 3 months

Submitted by FlyerInHi on March 22, 2018 - 11:26am.

I know some people who think deficit spending will crash the economy. But they still put their savings in the stock market and San Diego real estate.

Submitted by Myriad on March 22, 2018 - 1:09pm.

I don't see why homes in the sub $1.25M would decline. In fact, I would see those homes hold value vs higher priced homes since any loan at $750k or below still qualify for mortgage deduction. Unless the home price to rent goes a lot higher, or the central banks pull all the money they added to the system out at once, I see SD home prices staying at these prices for a while, if not increasing.

Submitted by gzz on March 23, 2018 - 11:52am.

The cause of increasing rates is a booming economy and growing incomes.

I think rates will go back down. They are so much lower in Europe and Japan. The reason was this is that they expected the dollar to weaken and eliminate the benefit of the extra interest. In fact in has been the opposite.

Large Euro and Japanese investors holding onto their local bonds at negative or 0/1% interest rates year after year is as dumb as when they were loaning us money for Option ARMS that S&P promised were "AAA."

Their own local stock markets are also much better investments than their bonds. But the best investments in the developed world remain in the USA and Canada.

Submitted by spdrun on March 23, 2018 - 11:56am.

Fed rate is 1.5-1.75%, should be 2.25-2.75% by early next year. Are 10y rates ever below the Fed rate?

Submitted by FlyerInHi on March 23, 2018 - 1:00pm.

I still maintain that the top 10 American cities are desirable.
The old economy cities are not doing well. Some cities like Pittsburg are recovering and on the way up. So not all real estate is equal.

Submitted by mom2dmd on December 25, 2018 - 11:30am.

Here's the short answer from https://www.forbes.com/sites/lcarrel/201...

"I don't think people have processed this," he said. "Especially, the state and local taxes being capped at $10,000. A lot of people don't fully understand what's going to happen in April."

Submitted by svelte on December 26, 2018 - 8:36am.

It's even more basic than that.

Supply and demand.

Submitted by Rich Toscano on December 26, 2018 - 9:02am.

Actually months of inventory have had a huge (relative) increase in recent months. The economy is still quite strong so I think rates/SALT (combined with already-high valuations) probably are the main cause.

Prices won't "fall off a cliff" - nobody is claiming that outside of the Zero Hedge crowd, right? But I would be surprised if prices didn't weaken under this new supply-demand equilibrium... assuming it continues.

Submitted by henrysd on December 26, 2018 - 10:09am.

The SALT effect on urban California housing is certainly exaggerated. For people in NJ and NY with 3% property tax, they are hurt big way for almost all home owners. But for California, it is much more limited. We have only 1% property tax and many people wrongly claim Mello-Roos as part of property tax deduction in the past.

The SALT restriction mostly affects (assuming 2 income family here):
1) Very high earners like those make $800K or more a year. Those people were able to deduct all SALT expenses in the past without triggering AMT. They had 39.6% normal tax rate, so their effective tax rate before AMT was higher than the AMT rate of 28%. The new law would strip their ability to deduct SALT.
2) Middle middle class stretching themselves to buy homes at 5 - 6 times of their annual income of $120-200K. They were able to deduct all SALT expenses in the past without paying AMT. They have around 15 - 30K worth of SALT expense, but only allow 10K now.

For upper middle class (those make $220-600k annually), SALT restriction has zero effect. Those people were paying AMT tax in the past, so SALT expenses were not allowed anyway. Actually the removing of AMT in those income range in the new tax law tremendously increases their after tax income. This creates a plus factor for housing demand.

For low middle or lower income class, it is unlikely they have SALT above 10K. Even if it is above, it will be by small amount. I know people bought homes 20 years ago locked in low property tax and living on not-so-much income, they may be hurt in other aspect of tax change, but not much with SALT deduction.

Submitted by mom2dmd on December 26, 2018 - 10:38am.

Housing costs in already obscene real estate markets effectively increased with this legislation. With the $10K SALT cap, homeowners in these areas will be paying more in federal taxes. Please correct me if I'm wrong. You don't think this will factor into future purchasing decisions? A ~$1M 4bd/2.5ba 2,400sf house in Poway (some 40yo without any updates) with property taxes at the cap gives me pause.

Submitted by flu on December 26, 2018 - 11:26am.

For some people when affordability is is already stretched as is, yes... For other people, more of an annoyance.. I don't know, paying $4000+/month for rent for a long time would give me pause.

If one is buying a $1million+ home in CA, chances are their AGI is already high (in order to qualify for traditional lending)...They are already getting hit with AMT where state and property taxes are already limited....Thr $10k SALT caps is a larger tax hit than AMT.. But don't think the extra tax hit will be significantly larger than many people who already have AMT tax bill to pay.

Also, SALT caps don't apply to people owning investment properties. they still write off the full property tax as a cost. Plus rent prices are still insanely high. Plus Prop 10 was thankfully defeated. No hurry to exit as a rental.

There will be some impact but don't see a doomsday scenario. I think when this SALT thing first came out, zerohedgy people were all over this with a dooomsday commotion.

Besides, if we wait long enough, banks may deregulate and start underwriting subprime loans again... and poof, an entire new generation of suckers are born a decade later from the Great Recession way back then.
I am kidding... ok, not really..

Submitted by mom2dmd on December 26, 2018 - 12:40pm.

"Falling off a cliff" is admittedly hyperbole and not my choice of words but those from the original post. I cited the Forbes article to point out: the average taxpayer has yet to process the implications from the new tax laws; and, thus, the impact from those new tax laws on the SD real estate market is still TBD. As per henrysd, doesn't the middle class stretching to buy homes at 5-6x annual income represent a significant percentage of SD homebuyers?

Submitted by FlyerInHi on December 26, 2018 - 12:57pm.

mom2dmd wrote:
I cited the Forbes article to point out: the average taxpayer has yet to process the implications from the new tax laws; and, thus, the impact from those new tax laws on the SD real estate market is still TBD.

The average taxpayer cannot process anything. He just listens to the realtor who is still telling him that, after tax, his monthly payment will be x. TBD after they buy the house and make the payments. A recession will bring things into perspective.

Submitted by ocrenter on December 26, 2018 - 1:42pm.

henrysd wrote:
The SALT effect on urban California housing is certainly exaggerated. For people in NJ and NY with 3% property tax, they are hurt big way for almost all home owners. But for California, it is much more limited. We have only 1% property tax and many people wrongly claim Mello-Roos as part of property tax deduction in the past.

The SALT restriction mostly affects (assuming 2 income family here):
1) Very high earners like those make $800K or more a year. Those people were able to deduct all SALT expenses in the past without triggering AMT. They had 39.6% normal tax rate, so their effective tax rate before AMT was higher than the AMT rate of 28%. The new law would strip their ability to deduct SALT.
2) Middle middle class stretching themselves to buy homes at 5 - 6 times of their annual income of $120-200K. They were able to deduct all SALT expenses in the past without paying AMT. They have around 15 - 30K worth of SALT expense, but only allow 10K now.

For upper middle class (those make $220-600k annually), SALT restriction has zero effect. Those people were paying AMT tax in the past, so SALT expenses were not allowed anyway. Actually the removing of AMT in those income range in the new tax law tremendously increases their after tax income. This creates a plus factor for housing demand.

For low middle or lower income class, it is unlikely they have SALT above 10K. Even if it is above, it will be by small amount. I know people bought homes 20 years ago locked in low property tax and living on not-so-much income, they may be hurt in other aspect of tax change, but not much with SALT deduction.

well put. thanks.

at risk of thread-jack, this may perhaps accentuate the financial benefit of mello-roos early payoff.

Submitted by flu on December 26, 2018 - 2:03pm.

Are today's home buyers really strenching thin to buy. Or is that a hyperbole and underestimation of today's buyers still able to buy?

I keep hearing people say "how could people afford to buy at these levels?" they must be buying and totally over extended. Do we have data on this, or that just anedectotal based on immediate personal/peer observations ?

I tend to believe people are underestimating people's ability to buy.

that said, rising rates and a coming recession , I think will make things very interesting.. Impact of SALT probably not nearly as an issue of those other two.

Submitted by The-Shoveler on December 26, 2018 - 3:02pm.

flu wrote:

Also, SALT caps don't apply to people owning investment properties. they still write off the full property tax as a cost. Plus rent prices are still insanely high. Plus Prop 10 was thankfully defeated. No hurry to exit as a rental.
..

Some low end properties will "still" cash flow even at this level and these rates.

Submitted by flu on December 26, 2018 - 3:13pm.

ocrenter wrote:

at risk of thread-jack, this may perhaps accentuate the financial benefit of mello-roos early payoff.

Very good point. If you are able to pay off your mello-ruse (sic) early, conceivably cash-out refinance on the primary and use the funds to pay off the mello-ruse (sic)...The mortgage interest rate is probably lower than the mello-roos interest rate, you lower the property tax that will be subject to SALT cap, and as exercise for the reader, you can try writing it off with the rest of your mortgage interest deduction. I wish the MR in Carmel Valley could be paid off earlier. I tried, it can't.

I sort of regret paying off my 2.5% 15 year mortgage early. A 2 year CD is now at 3% a 5 year CD well above that. If i left the same money in such such a laddered product, it would have been free earned interest. Many of you that kept with your ridiculously low 15 and 30 year fixed loans when rates were around 3% are going to make out like bandits. You won't be able to rent out a comparable home these days at comparable monthly costs, so what motivation would you have to sell?

Submitted by flu on December 26, 2018 - 3:17pm.

The-Shoveler wrote:
flu wrote:

Also, SALT caps don't apply to people owning investment properties. they still write off the full property tax as a cost. Plus rent prices are still insanely high. Plus Prop 10 was thankfully defeated. No hurry to exit as a rental.
..

Some low end properties will "still" cash flow even at this level and these rates.

Agreed, but the question soon will be, will we want to? Let's assume we could cash flow say at 4-5%. Would you want to deal with the hassle of a CD ends up being 4-5% with virtually no risk, and if you think the era of large appreciation is history....
That 4-5% in dealing with a rental probably doesn't include turnover and vacancy and unexpected repairs

Submitted by The-Shoveler on December 26, 2018 - 3:22pm.

Well there is still depreciation.

For those buying a low end primary it probably still beats renting.

Submitted by FlyerInHi on December 26, 2018 - 4:00pm.

flu wrote:

You won't be able to rent out a comparable home these days at comparable monthly costs, so what motivation would you have to sell?

True, the high rents are holding up the market.
But values are based on transactions and investor transactions are drying up with inventory going up.

A jobs led recession will cause rents to drop. With a recession coming, I wouldn’t buy until 1 year after the recession is announced.

Submitted by ocrenter on December 26, 2018 - 4:26pm.

FlyerInHi wrote:
flu wrote:

You won't be able to rent out a comparable home these days at comparable monthly costs, so what motivation would you have to sell?

True, the high rents are holding up the market.
But values are based on transactions and investor transactions are drying up with inventory going up.

A jobs led recession will cause rents to drop. With a recession coming, I wouldn’t buy until 1 year after the recession is announced.

impending recession seems to be the sentiment. which can be self-fulfilling.

Submitted by gzz on December 26, 2018 - 4:30pm.

There's no sign of a recession. Lots of employers have vacancies they want to fill, but not so badly they will raise wages on everyone to fill it.

Cal RE has a lot of factors that could allow another bubble to form. This time I want to ride it up!

The biggest "untapped" possible factor is $15 trillion worth of foreign mature market gov bonds making 0% to 1% decides they want the higher yields US assets offer. They got burned last time they did that because they stupidly purchased "AAA" private-label MBS.

Those memories are fading, meanwhile German/Japanese investors who invested in the USA 2 to 6 years ago massively outperformed their conservative brothers who purchased low to negative yield government bonds.

And these days no need to buy private MBS. Plain old Treasury Notes and GSE bonds still pay a ton more than their local bonds.

Submitted by ocrenter on December 26, 2018 - 4:28pm.

flu wrote:

I sort of regret paying off my 2.5% 15 year mortgage early. A 2 year CD is now at 3% a 5 year CD well above that. If i left the same money in such such a laddered product, it would have been free earned interest. Many of you that kept with your ridiculously low 15 and 30 year fixed loans when rates were around 3% are going to make out like bandits. You won't be able to rent out a comparable home these days at comparable monthly costs, so what motivation would you have to sell?

same reason I resisted paying off my 2% student loan...

Submitted by The-Shoveler on December 26, 2018 - 4:36pm.

I am not as sure a recession is coming anytime soon now.

I am thinking if the fed holds here (and communicates such), maybe a deal with China and we could be back in the race.

We will see I guess.

Submitted by flu on December 26, 2018 - 4:54pm.

The-Shoveler wrote:
I am not as sure a recession is coming anytime soon now.

I am thinking if the fed holds here (and communicates such), maybe a deal with China and we could be back in the race.

We will see I guess.

I don't think the trade war will be resolved anytime soon. China can sit it out and hope for a presidential change. China's premiere can rule indefinitely.

Well unless the Trump side concedes.

Submitted by The-Shoveler on December 26, 2018 - 5:13pm.

We will see I guess, seems like both sides could benefit from a compromised deal (the sooner the better),

Submitted by spdrun on December 26, 2018 - 6:03pm.

Ocrenter: one can hope...

Submitted by ocrenter on December 26, 2018 - 9:15pm.

flu wrote:
The-Shoveler wrote:
I am not as sure a recession is coming anytime soon now.

I am thinking if the fed holds here (and communicates such), maybe a deal with China and we could be back in the race.

We will see I guess.

I don't think the trade war will be resolved anytime soon. China can sit it out and hope for a presidential change. China's premiere can rule indefinitely.

Well unless the Trump side concedes.

I don’t think the trade war will end with Trump, President Pence will be equally if not harder on China. The Dems will not go the other way either come 2020.

Btw, news out of Taiwan is China is facing real GDP growth of 1.6% this year and likely negative GDP next year along with 10 million new unemployed. Things are going from bad to worse over there.

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