Earlier today we highlighted the negative implications for high end housing (RLGY) stemming from the principal real estate related provisions included in the GOP Tax Reform plan.
Specifically:
- Mortgage Interest Deductibility: For new home purchases, interest would be deductible only on loans up to $500,000, down from $1 million today; existing loans would be grandfathered.
- SALT & Property Taxes: The GOP plan repeals the deduction for state and local income and sales taxes. It allows a deduction for property taxes, but caps it at $10,000. That limit applies to married filers and individuals.
Embedded in those proposed changes is an assumption that total itemized filers would drop from roughly 35% currently to ~10%.
The other relevant provision relates to changes in the treatment of capital gains from the sale of property:
- Exclusion of sale provision --> Under the proposal, to qualify for exclusion of capital gains on sale of a residence a person would now have to live in the property as a primary residence for 5 of the last 8 years (currently 2 of the last 5 years) and could only take that exemption every 5 years (currently every 2 years).
In short, as proposed, the floated provisions are almost universally negative for housing.
The change in exclusion of sale provision would likely serve as an incremental drag on supply/turnover. Concomitantly, the MID change (lower cap and exclusion of 2nd properties) would pressure home values at the middle-to-upper-middle tier and drag on demand at the high end, while the grandfather clause (full MID maintained for existing loans) would serve as incremental drag on new supply. This, of course, is developing at a time of acute supply shortage and inventory led rollover in volume growth.
Suffice to say, the ascerbic criticism launched by NAR and Homebuilding Lobby has been unsurprising. And as David Hoppe, former chief of staff to Speaker of the House Paul Ryan, noted this afternoon on our Tax Reform Flash Call, the MID provision is likely to be "the key issue" in the House markup in the coming weeks.
We'll update as developments progress.
Link >> Tax Reform Summary
Joshua Steiner, CFA
