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March 2018

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–continued from page 15 That affects sales a little. Even though there will be a disincentive, there will still be a good amount of home-buying activity because of the limited supply and high demand for houses, say, that are priced $500,000 and under.” Wei said renters in the market for lower-priced property — a house for $350,000, for example — would likely be better off continuing to rent and taking the standard deduction. A report released by Zillow, a home search and data website, found that 14 percent of U.S. homes have high enough market value and tax bills that a new buyer borrowing 80 percent of the home price would benefit from itemizing. But under the previous tax law, 44 percent of homes were pricey enough (the prior cap was $1 million) to warrant buyers itemizing deductions. Federal Reserve Interest Rate Adjustments and Higher Mortgage Interest Rates The Federal Reserve raised interest rates in December, the third time in 2017, due to a growing economy and improved labor market. The Federal Reserve sets interest rates — the amount banks will be charged to borrow money from Federal Reserve banks — in an attempt to control inflation and stabilize the economy. The new tax legislation will result in higher mortgage interest rates for two reasons, Zandi noted in an email. “The Federal Reserve will need to raise interest rates more aggressively given that the deficit-financed tax legislation will lead to a temporary pick-up in growth, and since the economy is already at full employment, increasing price pressures,” he noted. “Second, because the federal government must borrow more to finance the tax cuts, the [U.S.] Treasury will sell more bonds, pushing interest rates higher.” The higher mortgage-interest rates, combined with the greatly reduced mortgageinterest and property-tax deductions, will increase the true cost of buying a new home, Zandi added. The increased costs will weaken housing demand and drag down price growth, especially in communities where those deductions are important incentives for home buyers. Capital Gains Taxes Greatly reducing the tax incentive to buy a home is sure to rattle the residential real estate market, but the industry breathed a collective sigh of relief when the final bill didn’t tamper with the exclusion for capital gains tax from the sale of a primary residence. Homeowners selling their primary residence may exclude up to $250,000 of the profit from taxation — $500,000 for married couples filing jointly — as long as they have lived in their primary residence for at least two of the past five years. Earlier versions of the bill would have increased the requirement of living in the primary residence to five out of eight years. That draft of the bill would have had an even more negative impact on an already tight supply of houses for sale, said Clark. Homeowners who need to sell a house after a couple of years due to circumstance (including relocation for a job or relationship changes, such as divorce or marriage) would likely sit on their property longer, said Clark. About 6,943,000 California homes are occupied by homeowners, according to 2016 National Association of Realtors (NAR) research, and most of those homeowners are just now coming to grips with the new law’s effect on their after-tax housing costs. Certainly, these are volatile political and economic times and the housing market is intertwined with the overall health of the economy. Whether predictions and projections for 2018 are realized is yet to be seen. For now, the consensus is desirable housing markets are likely to stay desirable and there will be people with enough money to buy in those markets, but the rate of price growth is expected to slow. In other words, California’s out-of-control housing prices might just reset to slightly more affordable numbers — by California standards, that is. |||| 16 | ARROYO | 03.18

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