Santa Cruz Real Estate  Digest,  Ed. 29
January, 2018 - In This Issue:
In This Month's Issue

After months of speculation and uncertainty, the final Tax Cuts and Jobs Act has been signed into law. We cover some of the most important changes related your real estate in our first article of this month.

Population movements to and from a geographical region can provide information about the housing market. We discuss an emerging trend in California migration patterns, and what it could mean for the real estate market in the proceeding article. 

A new year is here and there is a possibility that we will see some big changes in the world of real estate. Some local counties, including our own here in Santa Cruz, are pushing for rent control. What would this mean for the long-term health of the real estate market? Changes to Prop 13 may also be on the horizon. We discuss these important issues below. 

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The Tax Cuts and Jobs Act has been signed into law. There were some big "wins" in the final bill from the perspective of homebuyers, owners, and real estate investors. However the bill removes important incentives for homeownership and may have an adverse impact in some markets. According to the National Association of Realtors , home prices will grow at a slower pace of 1-3% nationally, though some local markets in high cost, higher tax areas will likely see price declines. One such county, Santa Cruz, is predicted to be one of the five metro areas that will be most affected by the new tax law according to this article.


"Wins" for Real Estate
The final bill did not modify the current law on the exclusion on the gain of sale of a principal residence. The current law states that, to qualify for at $250,000 (single) or $500,000 (married) exclusion on the gain of sale of a primary residence, a homeowner must have resided in a property for 2 out of the previous 5 years. The Senate-passed bill would have stipulated that homeowners must live in their home for 5 out of the past 8 years to qualify. The change would have likely further restricted housing supply in an already constrained market locally and nationwide.
Interest remains deductible on second homes, but is subject to the $1 million / $750,000 limits (see below). The House-passed bill would have eliminated the deduction for second homeowners. This will be particularly important for the demand-side of the Santa Cruz real estate market, where second-home buyers have been trending upwards over the past two decades.
The final bill allows an itemized deduction of up to $10,000 for the total state and local property taxes and income or sales tax. While less favorable for homeowners than the previous law, this was a major improvement from the House and Senate bills which proposed complete elimination of state and local taxes.

Cap on Mortgage Interest Deduction

The Tax Cuts and Jobs act reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered in and are not subject to the new $750,000 cap. This is one of the most important and potentially deleterious changes for the Santa Cruz Real Estate Market. According to Zillow Group Policy Advisor, Alexander Casy, capping the deductions could contribute to slower home value growth in the priciest communities by limiting some buyers' purchasing power. Santa Cruz is one such community, and will be disproportionately affected.


 

Interest paid on home equity loans (second mortgages) through 12/31/25 will not be deductible unless the proceeds are used to substantially improve the residence. Typically, this kind of deduction is important for financing major home renovations, so eliminating it could contribute to underinvestment in home repair and updates.


 

The standard deduction will be doubled from $6,350 to $12,000 for single filers and from $12,700 ro $24,000 for couples filing jointly. This change will have a significant impact on the number of homeowners that decide to take advantage of the mortgage interest deduction. According to a study by Zillow, itemizing and claiming mortgage interest deduction will only be advantageous for 14.4% of homes nationwide, a steep decline from the previous 44% of all homes. This reduces the incentive to buy a home and may hurt housing-demand.





Population movements to and from a geographical region can provide information about a region's housing market. In California, an 11 percent increase in our net domestic out-migration suggests that high housing and rental prices, in conjunction with a high cost of living is motivating people to relocate elsewhere.

According to a report released by the US Census Bureau in late 2017, 142,932 more residents have relocated outside of California than arrived to live in this state. This article explains that new residents from other states were just 1.3 percent of all Californians, which is low in comparison to the average nationwide pace of Americans moving across state lines in 2016. There has not been a decrease in population growth due to international immigration into the State, as well as more births than deaths. Surprisingly, the state does do relatively well at keeping it's residents, with the third-highest retention rate in the Country. Even so, this migration data contributes to a continued upward trend in net out-migrations since 2013. Perhaps more concerning is that the people who are leaving are primarily middle and lower-income workers.

A majority of these out-migrators were homeowners and people making under $100,000 per year. Only about 2,000 of the 142,932 or 1.4 percent of people that left were high-income earners. Furthermore, and a vast majority of movers went to Texas, Nevada, or Oregon despite lower economic growth in these areas. This suggests that it's not the high corporate tax-rate that is driving out high-income earners. Rather we are seeing middle and lower income individuals and families moving to areas with fewer economic opportunities in search for more affordable housing.

What does this mean for housing demand? With a chronically low supply of housing in comparison to demand, we do not expect housing demand to decline drastically anytime soon despite the net outflow of residents. On the other hand, if this trend continues, we would expect to see a gradual cooling of real estate markets across the state. What would increase the pace of marketing-cooling? Large tech and financial companies leaving the state. According to this article , Redfin CEO Glenn Kelman predicts that skyrocketing housing costs in thriving coastal cities will lead to a "mass migration" of companies and talent to other parts of the country. 

2018 will be important year for Californians to address our housing supply issue to ensure our long-term position as a leader in the national economy. As Kelman aptly states: "The technology companies, the Wall Street companies, they are chasing the talent [and] the talent is chasing affordable housing."






Rent Control:

According to this article, Assemblyman Richard Bloom (D-Santa Monica) will be proposing legislation on January 11th to repeal Costa-Hawkins, which would allow local governments to implement new rent control policies. Additionally, tenant advocates and the Los Angeles based AIDS Healthcare Foundation have filed a potential 2018 initiative to repeal Costa-Hawkins. At the "No Place like Home" symposium in Santa Cruz, a representative of the Santa Cruz Tenant Organizing Committee rallied for support for a 2018 Rent Control campaign.

With some of the highest rents in the state, would Santa Cruz benefit from rent control? In my opinion, in the long-run, no.

At face value, rent control keeps rent low for tenants who are struggling to find affordable housing in a high-priced market like Santa Cruz. It would shift the power from the landlord to the tenant. However a majority of economists, on both sides of the political spectrum, agree that rent control will likely decrease the quality and supply of rental housing, while incentivising people to stay in their houses longer than they would have otherwise. Even worse, it may also result in more affluent individuals dominating the rental market. In an already tight market, this would exacerbate the supply-issue in Santa Cruz and the Bay Area, and result in lower-quality housing overall. You can find these points further explained here .

Evidence for two of the points above were supported by a recent study , conducted by two Stanford Economists. The researchers found that rent controlled tenants were more likely to stay in their current homes and the loss of housing may have driven up rents elsewhere. They found that "six percent decrease in housing supply led to seven percent increase in rental prices. These caused an aggregate welfare loss to renters of $5 Billion." So while some benefited from lower rents the overall health of the larger rental market suffered.

Record high rents in Santa Cruz is serious issue that needs to be addressed. As recounted in this Sentinel Article , families, students, and individuals are suffering from what is officially a full blow housing crisis in Santa Cruz. Rent control may provide temporary relief, but to address this issue in an effective and forward-thinking way, local government would be wise to increase incentives for and remove regulations that inhibit rental housing construction. Unfortunately, rent control would do the opposite.

The Future of Proposition 13

Under Prop. 13, property tax increases on any given property are limited to no more than 2% per year as long as the property is not sold. A property is assessed for tax purposes only when it changes ownership and property taxes may not exceed 1% of the sales price with the 2% yearly growth-cap applicable to future years.

Through Propositions 60 and 90, those who are 55 and older can purchase a property of equal or lesser value than the original property sold (using the current-day sales price), and can transfer their tax base to the new property. This means these individuals avoid reassessment and will not see a dramatic increase in their property taxes.

Unfortunately, those individuals that qualify for prop 60 and 90 face restrictions on where they can purchase homes and transfer their tax base. For example, Santa Cruz County does now allow inter-county transfers, meaning you cannot transfer your tax base if the home you sold was in a different county. A proposal by the California Association of Realtors addresses this issue. Under the initiative, homeowners who are over 55 or severely disabled would be able to keep those lower tax obligations for any home they purchase, as long as it's within the state of California.

What are the pros and cons of this initiative?

The downside is that this kind of change could be costly for local governments. In a high-priced market like Santa Cruz, this may be a real issue. The county would likely lose tax revenues as individuals from less expensive markets moved into homes and transferred tax bases that reflect slower growing, lower priced markets.

The obvious and much needed benefit from this change would be an increase in housing inventory. The Legislative Analyst's office estimates that the number of homes for sale could jump by tens of thousands per year.


Christine's Corner













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