It seems like a lot of people are tripping over themselves regarding the GOP tax plan. For California, the housing cheerleaders always trumpeted the massive amount of tax deductions you got when buying a ridiculous crap shack. I always found this to be absurd. You usually got “free market” thinkers on the economy but then suddenly, wanted massive government support when they bought their expensive home. In the Bay Area a crap shack will cost you $1.5 million if you even want to have a parking spot within walkable distance. So it is no surprise that the GOP tax plan doesn’t give two seconds of thought as to what is good for California. And good just means on what side of the dinner table you are sitting at. Frankly, the rest of the country subsidizes the crazy housing market in California and other expensive states so it never made sense to have a mortgage interest deduction of up to $1,000,000 when the typical house in the U.S. costs $200,000. In regards to housing, the GOP tax plan will not help California housing values.
Subsidizing expensive California
There is some irony that San Francisco, a city that touts to be progressive and open to all is so incredibly expensive that only the elite can afford to live there. Surely you can see the cognitive dissonance in that? We want to help you so long as you stay far and away from our expensive NIMBYism enclave. An area where making $100,000 a year will confine you to living with roommates and eating Ramen from your tech cubicle.
Here is why capping the mortgage interest deduction makes total sense from an equitable perspective. First, most people don’t live in expensive California crap shacks:
They typical home costs $203,400. So assume a 10 percent down payment and you have an $183,060 mortgage. Assume that mortgage is at 4 percent interest. You are paying roughly $7,200 a year in mortgage interest. Now let us assume you buy a $1,000,000 California crap shack. Say you put down 20 percent. You are paying over $32,000 a year in mortgage interest. So why in the world is the person buying that California crap shack getting such a big mortgage deduction when by definition the typical home in the US costs $203,400?
Of course, the National Association of Realtors (NAR) is upset by this:
“(Mercury News) The tax incentives to own a home are baked into the overall value of homes in every state and territory across the country,” association president Elizabeth Mendenhall wrote in a news release over the weekend condeming the proposed tax overhaul. “When those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10 percent, and even greater in high-cost areas.”
I love how this is phrased. So basically socialism is baked into the home price. Okay you free market wannabes. You can’t have it both ways (okay, you can). The reason the NAR is upset by this is that they make money when people are churning real estate – meaning more buying and selling. They want volume. Like the McDonald’s of housing. So if this stalls home sales they lose.
Another fun item for California is the following:
“Another controversial housing-related item in the tax proposals is the capital gains provision. Under current law, homeowners can exclude up to $250,000 (or $500,000 for married couples) in capital gains on the profit from the sale of a home — if they have lived in the house for two of the last five years. Both the House and Senate proposals would change that — homeowners must have lived in the house for five of the past eight years to qualify for the savings.
Last year, 13 percent of homeowners in California had lived in their home for between two and four years, meaning they won’t be eligible for that tax exclusion, according to the National Association of Realtors. Some housing experts worry the GOP tax plans will encourage Bay Area homeowners to stay put instead of selling, exacerbating the region’s housing shortage.”
Bwahaha! So much for the home equity train. I’ve talked about this before but housing cheerleaders like to paint this quaint vision of getting old in a home, painting the walls of your kids bedroom, and acting as if you live in a place for 30 years. No, in reality most are house humpers that lust after those HGTV shows and can’t wait to sell into a bigger property. Well now, you have to wait five to eight years before working on those cap gains. Can you tolerate a crap shack for two years? Sure. Can you tolerate it for 5 to 8 years? Hmmm.
And most Americans don’t itemize:
This bill does not help your typical California house humper. It will help the majority of renters. Why? Because of the above. The standard deduction going from $6,350 to $12,000 for single filing households and from $12,700 to $24,000 for married filing households actually helps out the typical American household.
I hesitate to get into the tribal mentality of “blue” team and “red” team because ultimately it divides people from actually doing a deeper analysis. There are good ideas and bad ideas coming out from both parties. In the above case regarding housing, a place like Los Angeles County with the majority of households being renters, it will help at least with their tax bill. This won’t help your future crap shack buyers in the Golden State.