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March 2018

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WILL THE NEW TAX LAW HAMMER<br />

CALIFORNIA PROPERTY VALUES?<br />

Pasadena may emerge relatively unscathed by tax reform’s<br />

negative impact on California’s housing market.<br />

BY KATHLEEN KELLEHER<br />

President Donald Trump may have dented the growth of California property<br />

values when he signed the Tax Cuts and Jobs Act into law last December,<br />

experts say. The new law sharply reduces deductions of mortgage loan interest<br />

and property taxes, and also caps other local and state tax deductions — gutting many<br />

financial incentives for home ownership. The state’s more than 6.9 million homeowners<br />

are grappling with the new law’s impact on their tax bills — both immediately and over<br />

the long term. The big question is, what will the tax hikes do to the housing market and<br />

property values?<br />

“The <strong>2018</strong> tax reform bill is going to have an adverse affect on housing sale prices<br />

and housing supply in California,” said Oscar Wei, a senior economist for California<br />

Association of Realtors (CAR). “It may not be a significant impact, but it will have an<br />

impact. Prices will continue to grow, but the tax reform bill lowers the price growth.”<br />

Both home prices and appreciation are expected to take a hit from the new tax bill.<br />

Before it passed, California home prices were predicted to grow 4.2 percent by the end<br />

of <strong>2018</strong>, Wei said. Factoring in the slashed deductions, CAR has lowered its growth rate<br />

prediction to 3.2 percent, he added. By contrast, he noted, single-family home prices<br />

in 2017 grew at 7.2 percent. The median projected price of a California house in <strong>2018</strong><br />

is $555,600 — $5,400 less than the median predicted before the new law. The 2017<br />

median house price was $538,500, said Wei. (These projections don’t include condos,<br />

townhouses and new construction.)<br />

Nationally, home prices are predicted to be 4 percent lower than they would have<br />

been without the new tax legislation, with the impact peaking in summer of 2019, according<br />

to a report by Mark Zandi, chief economist for Moody Analytics, a New York–<br />

based economic research company. “Any longer-run benefit from the lower marginal tax<br />

rates will be washed away by the fallout from the bigger budget deficits and government<br />

debt load,” Zandi, a critic of the tax reform plan, wrote. “Good tax reform is very difficult<br />

to do.” And the tax reform bill lawmakers passed did not get it done, he added.<br />

Still, some real estate experts and economists expect house sales in Pasadena and<br />

other hot markets, where demand outstrips supply, to sell as briskly as before tax reform.<br />

“I have not seen any impact on the market yet,” said Shel Downing, a Keller Williams<br />

Realtor, who sells property all over Southern California. “I am seeing a slowing in outlying<br />

areas such as Upland in the last two or three months. But in the hubs like beach<br />

cities and Pasadena, I have not seen it.”<br />

But tax reform may still impact demand for moderate-priced homes because some<br />

potential buyers may find that renting is preferable with the new increased standard<br />

deduction, said Wei. “The impact is small to this price segment, because the supply in<br />

this sector is extremely short,” he continued. “Since there is more demand than the supply<br />

can fulfill, the impact on sales is very minimal.” The most competitive housing sector<br />

is lower-to-middle-range homes for any given neighborhood, said Wei. The new law is<br />

not expected to impact that price sector because there are far more buyers than available<br />

houses.<br />

–continued on page 15<br />

03.18 | ARROYO | 13

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