Weeks ago the Republican-led tax overhaul began its march toward the sea. Based on the property tax deduction cap alone, the bill will have an outsized impact on Texas homeowners. Under the House bill, a Dallas area home worth just $435,000 would hit the $10,000 cap for property tax deductions. Data collected from ATTOM Data Solutions breaks that down into the raw numbers above this paragraph. On average between the four North Texas counties, 10 percent of homes will surpass the limit once the bill is signed into law.
Northern Dallasites may be surprised it’s as low as that. But here’s the problem. How many would have been at the cap five years ago? How many of us will be at the cap in five years? The Republican plan appears to have no formula for increasing the cap ceiling as home values increase.
We’ve seen this conundrum in Hawaii. Several years ago, the state changed its property tax rates to jump at $1 million. The purpose was to tax owners of a second home who tended toward more expensive residences. That change included no mechanism for adjusting the $1 million cap as home value increases. With the median house on Oahu costing $752,000 in October 2017, a lot of locals are being swept up in higher property taxes that were actually meant to exclude them. Each year it gets worse; cries to adjust the ceiling have so far fallen on deaf ears.
In Dallas, we’ve seen softness in the upper tier of real estate for well over a year. Sapping the ability to fully deduct property taxes will surely impact that already tougher end of the market. “Boo-hoo for rich people” you may be thinking, but how many buyers on the cusp of the cap will scale back purchases because of it? How many will try to give themselves breathing room that will hasten a pull-back into even lower tiers of the market that are already red hot?
Think about it—how many years before a $350,000 house increases in value enough to hit the $10,000 property tax cap? What about a home worth $300,000? You may think it’s years away, but most metro homes have gone up by a third in value over the past five years. That $350,000 home in 2012 is likely valued at $470,000 today. That’s already $35,000 over the $435,000 needed to hit the cap in Dallas, and it happened in five years.
The other component was a reduction in mortgage interest deduction for mortgages valued at $1,000,000 down to $500,000. The chart above outlines the percentages of homes in each North Texas county that surpass that number year-to-date.
Again, you may be thinking ho-hum. But remember this is per year and cumulative. So, assuming all things are equal, next year it will jump to 13.8 percent of homes in Dallas County. Sure, some of the original 6.9 percent will at some point change homes and remain in the $500,000-plus Mortgage Club. But since we all don’t move every year and this is a new tax, the first several years will show outsized growth in numbers before reaching a stable level.
As we saw in the first chart, 11.1 percent of Dallas County homes pay more than $10,000 in property taxes. With our tax rates, that equates to a home valued by the Dallas County Appraisal District at $430,000. Let’s say that DCAD undervalues middle-tier homes by 40 percent (I’m low-balling here because it’s worse the more expensive the home). That means perhaps 16 percent of all homeowners are right now sitting on more than $500,000 in potential mortgage. That is this year.
For every year property values increase, so will the number of mortgage holders with over a half-million in loans. I’m not boo-hooing for the multi-millionaires. What we’ll see is that, just like in the property tax component, it’s the in between spaces—the middle class—that’ll get hurt most.
That’ll either drive down prices in those spaces or cause buyers on the cusp to aim lower. Maybe I had a $600,000 budget, but because of the tax situation, I may aim for a $400,000 to 500,000 fixer-upper that is valued by DCAD at $350,000. That would offer $80,000 in headroom on property tax deductions and keep me under the $500,000 mortgage cap in interest deductions.
The alternative Senate plan would keep the $1 million mortgage interest deduction but would eliminate interest deductions on home-equity loans. This scenario lessens the impact of homebuyers in the in-between spaces. However, the removal of the home equity loan interest deduction would have a biting impact on home renovation in all home price bands. It’s worth noting that home improvement is the No. 1 reason people take out home-equity loans.
Taken together, these tax proposals will put increased pressure on lower-priced homes (just what we don’t need) that will ultimately erode prices in the in-between, middle class spaces. For many it will spark downward housing mobility and knock them off the property ladder altogether. Aging homes (and owners) may pass on a renovation, whether for a new kitchen or to help with changing needs and mobility issues. The main reason for this? While the tax burden goes up, wages will likely remain stagnant. The shocking gulf of income inequality will percolate into real estate below and above the new caps.
As always, it will be the lower and middle segments that take the biggest hit. This is especially true in the Senate plan that drops home-equity loan interest deductions, which presently allows up to $100,000 to be deducted for a married couple ($50,000 each).
Home equity loans are overwhelmingly taken out for home renovations and are disproportionately used by poorer homeowners who can’t just write a check to cover their costs. Removing the deduction on those loans makes them less attractive as they become more expensive. The Senate plan restored mortgage interest deduction for $500,001 to $1 million. In order to get that money “back,” they’re hitting home-equity loans instead.
What this means: those with $500,001 to $1 million in mortgages get to keep their deduction on the back of home equity loans, which are more often taken out by people with a mortgage below half-a-million.
And I’ve not said a word about the second home market where all property tax and mortgage interest deductions evaporate. How many homes in Dallas aren’t primary residences? I’ll tell you that in the condo market, it’s a significant number. Many are rentals. Who will eat the increased landlord expenses?
Like many proposals by this administration, it’s already passed the House and is due to slide onto Senators plates’ before the turkey leftovers are gone. Let’s see who has the guts to say “no” with midterm elections a year away.