Recently I listened to a great episode of the Ted Radio Hour on NPR. The episode was entitled: Can We Trust the Numbers.
Numbers and statistics tend to lend credibility to claims and assertions. But numbers can be skewed in so many ways. The cherry-picking and manipulation of raw data can be used to spin a point of view in one direction or the other. Where you get the data, how you filter it and what data points you choose to report are all ways in which raw data can be manipulated to support or refute certain claims.
Data is data, and it is important to trust facts, but it’s just as important to ask questions when presented with data….even if that data is in the form of a very pretty, professional looking chart. We need to know and understand where the data came from, the size of the data pool, the questions that were asked (or the formulas used). This is as true in real estate as it is with science, behavioral studies, and politics. Context matters.
Solo living is becoming more difficult for younger generations, especially for millennials who are struggling to afford rising home prices. Shared living, such as cohabitating with roommates or parents, is a way to cut down on costs and living expenses—a route many young professionals are choosing to take. But millennials are not the only ones seeking the benefits of cohabitation. Older, retired people are also opening their doors to roommates as a way to off-set monthly living expenses, or in some cases, for companionship or assistance with daily household chores.
According to a recent Zillow analysis, 30 percent of adults across the country are either living with their parents or a roommate—this number has grown by 8 percentage points since 2000.
As rents and home prices have outpaced incomes, living alone is no longer an option for many working-aged adults. By moving back home with family or sharing a place with roommates, working adults are able to afford to live in more desirable neighborhoods without shouldering the full cost alone. Unless current dynamics shift and income growth catches up with and exceeds the pace of price and rental appreciation, this trend is unlikely to change.
Financial security is similarly increasingly hard to come by for those who are retired or entering retirement. Many people simply have not saved enough money to maintain their pre-retirement living standards. The rising cost of health care, increased life expectancy and lower interest rates only exacerbate the situation. In addition, a Fannie Mae survey found that baby boomers are more likely to be carrying mortgage debt into their retirement years than previous generations were.
For the time being, it seems, adult kids as well as their retired parents might enjoy the mutual benefits of co-habitiation.
Although Oregon isn’t often included in references to high tax states, we are not far from the top of the list. Oregon ranks #7 in highest average income taxes paid per state. With the reduction of state and local tax deductions (SALT) on your federal income tax return down to a maximum deduction of $10,000, higher tax states like Oregon are more greatly impacted by the tax reform bill passed in December. It’s kind of a double whammy for Oregonians. We can deduct less of what we pay in local taxes, which makes our federal income tax bill greater, which in turn makes our state income tax higher (because state income taxes are determined off of our federal income tax return).
There are so many reasons people decide where they are going to live. Employment is a major factor. As is quality of life, weather, and of course, affordability. A question that has continued to pop into my mind since the passing of the final tax bill is whether or how much the tax reform will impact migration out of Oregon and into neighboring Washington….particularly moves from Portland to Vancouver. The lack of income taxes in Washington has been an influential consideration for many people in deciding between Portland and Vancouver. People can work in Portland, enjoy the robust arts, cultural, culinary scene in Portland, and as long as they’re willing to suffer the commute back across the river, live in Vancouver to avoid paying the substantial Oregon income taxes. By the way, they can also do all of their shopping in Portland, to avoid the sales tax imposed in Washington.
Will the final federal tax reform bill tilt the scales further in that northerly migration? I suspect for some it will. Especially those who do not need to physically be at work in Portland, but can work remotely from home.
The final tax bill passed by Congress in December of 2017 included a couple of last minute, final revisions to the real estate related changes outlined in my previous post. The tax reform had threatened to increase the amount of time required by homeowners to live in a home in order to avoid capital gains taxes on profits from two of the last five years to five of the last eight years. That proposed changed was dropped from the final bill. Homeowners still need only live in their home for two of the last five years to avoid the capital gains tax on profits of more than $250,000 (or $500,000 for married couples) on the sale of their primary residence. The other real estate related revision in the final bill was a change to the amount of mortgage interest homeowners can deduct. Previously, homeowners could deduct mortgage interest on up to $1 million dollars of mortgage. The latest version proposed reducing that deduction so that it applied to only $500,000 of mortgage. The final bill settled on interest on mortgages up to $750,000 being deductible. The final version also allows mortgage interest on second homes to be deducted, which had threatened to go away entirely in previous versions.
The current versions of both the house and senate tax reform proposals include changes that will impact the real estate market. The biggest impacts will come from changes to 1) the mortgage interest deduction; 2) capital gains exemptions; and 3) local property tax deductions.
Under the proposals, allowable mortgage interest deductions will be reduced from interest on $1M of mortgage down to $500,000 of mortgage. However, this change would only affect new mortgages (those taken out after the new tax law were to go into affect). While theoretically only impacting the higher end market, the effects could ripple out to the rest of the market. Because existing mortgages would be grandfathered in (which means they could continue to deduct the same amount of interest on their mortgage), there would be more incentive for those homeowners to stay put, which could impact the amount of available inventory in the upper end, which could then impact pricing and affordability in that sector. If it becomes more expensive to move-up into a higher-end home because of lack of available inventory, diminished tax deductions, and the need/desire to put more money down (because of the diminished deductions), then the lower-end homeowners are more likely to stay put as well, which could in turn affect inventory and affordability in that sector as well.
Proposed changes to the capital gains exemptions would require a homeowner to have lived in his or her home for 5 out of the last 8 years, as opposed to the current 2 out of 5 years requirement, in order to claim an exemption on their capital gains from the sale. Again, this change would incentivize more people to stay put for longer periods of time in order to reduce their tax liability upon selling. In a market that has appreciated significantly over the course of the last five years, many people will want to ensure they take advantage of that tax savings by staying in their homes for at least 5 years. More people staying in their homes, means less inventory, which could in turn mean higher prices.
The elimination of the deduction of state and local taxes, which includes property taxes, would likely impact the higher end market more than the lower end. More homeowners in the higher end market itemize their deductions to begin with and the higher the property value, the higher the property taxes and thus the greater the impact of eliminated deductions.
If more people choose to stay in their homes in order to reduce their tax liabilities moving forward, one might conclude that in addition to there being fewer homes for sale, there would also be fewer buyers. This could turn out to be true and we may, in fact, see a reduced pace of sales as a result, which could dampen appreciation. We are already seeing a slow-down in the pace of appreciation – not depreciating prices, just a slow down of appreciation. This, I think, is just a natural course correction as the previous rate of appreciation could not be expected to continue in a healthy manner. However, despite the fact that fewer people may elect to move if these tax reform proposals go into effect, the quality of life here and our relative affordability compared to our west coast neighbors (San Francisco, San Jose, San Diego and Seattle) I think will continue to be a powerful draw that will motivate people from out-of-state to move here. Oh, and then there is the flood of millennials that is expected to start entering the market and buying their first homes. I think the pressure on demand will continue to exceed supply….at least for the short term.