December 13, 2017
Cushman & Wakefield have posted The Great Tax Race: How the World’s Fastest Tax Reform Package Could Impact Commercial Real Estate. There is a lot of interesting insights in the report, notwithstanding the fact that ultimate fate of the Republicans’ tax reform is still a bit up in the air. Indeed, C&W estimates that there is a 1 in 5 chance that a bill will not pass this year.
Commercial Real Estate
C&W states that history
suggests that tax law changes by themselves are often not key drivers for transactions or for investment performance. However, there is likely to be a period of transition and market flux as investors restructure to optimize tax outcomes with implications for the underlying asset classes. Corporations are likely to separate the real estate aspects of their businesses. (2)
The commercial real estate industry is largely exempt from the biggest changes contained in the House and Senate bills. 1031 exchanges, for instance, have not been touched. C&W sees corporations being big beneficiaries, with a net tax cut of $400 billion over the next 10 years; however, they “anticipate that the tax cut will be preferentially used to return capital to shareholders or reduce debt, rather than to increase corporate spending.” (2)
Residential Real Estate
C&W sees a different effect in the residential real estate sector, with a short-term drag on home values in areas with high SALT (state and local tax) deductions, including California, NY and NJ:
The drag on home values is likely to be largest in areas with high property taxes and medium-to-high home values. There is also likely to be a larger impact in parts of the country where incomes are higher and where a disproportionate proportion of taxpayers itemize. Both versions of the tax reform limit property tax deductibility to $10,000. While only 9.2% of households nationally report property taxes above this threshold, this figure rises to as high as 46% in Long Island, 34% in Newark and 20% in San Francisco according to Trulia data.
The Mortgage Bankers Association (MBA) estimates that 22% of mortgages in the U.S. have balances over $500,000, with most of these concentrated in high costs areas such as Washington, DC and Hawaii—where more than 40% of home purchase loans originated last year exceeded $500,000. This is followed by California at 27%, and New York and Massachusetts at 16%. (6)
C&W also evaluated tax reform’s impact on housing market liquidity and buy v. rent economics:
The median length of time people had owned their homes was 8.7 years in 2016—more than double what it had been 10 years earlier. Now that interest rates have begun to tick upward from their historic lows, the housing market may face a problem called the “lock-in” effect, where homeowners are reluctant to move, since moving might entail taking out a new mortgage at a higher rate. This leads to the possibility of decreasing housing market liquidity in high-priced markets.
All things considered, the doubling of the standard deduction and the cap on the property tax deduction is likely to have the largest impact on the buy vs. rent incentive, especially as it seems likely that there will be minimal changes to the mortgage interest deduction in any final tax reform bill. (7-8)
December 11, 2017
I will be speaking in a free American Bar Association webinar tomorrow, Challenges for Modern Housing Markets:
Our current housing system is not sustainable in terms of the market, residential tenure, cost stability, and neighborhood inequality. Our panelists will discuss some key areas in which housing must be stabilized in order to strengthen our economy and society. Our panelists will address ways to lessen the volatility of housing prices and home mortgage lending, the importance of and ways to improve stability of residency, ways to improve the sustainability of affordable housing, and recent lawsuits that have reframed the problem of distressed and inequitable communities.
The other speakers are
- Professor Kristen Barnes, University of Akron School of Law
- Professor Andrea J. Boyack, Washburn University School of Law
The program will be moderated by Professor Wilson R. Freyermuth, University of Missouri School of Law.
My remarks will be drawn in part from my work on the Federal Housing Administration.
The webinar is free and open to all. It will take place Tuesday, December 12, 2017 at 12:30 p.m. Eastern/11:30 a.m. Central/9:30 a.m. Pacific.
Register for the webinar at http://ambar.org/ProfessorsCorner.
The webinar is sponsored by the ABA Real Property, Trust and Estate Law Section Legal Education and Uniform Laws Group. It is part of a series of webinars that features a panel of law professors who address topics of interest to practitioners of real estate and trusts/estates.
- The United States Department of Housing and Urban Development released its 2017 Annual Homeless Assessment Report. The report noted more than half a million individuals were displaced on one single night in 2017. Though the half a million is a large sum, the number of families displaced from homes decreased by over 5%. While this decline is great, the number of homeless veterans increased. Further large cities on the West Coast account for the increase in individual homelessness.
- The U.S. Government Accountability Office released a report entitled, Financial Audit: Federal Housing Finance Agency’s (FHFA) Fiscal Years 2017 and 2016 Financial Statements. The report noted the FHFA complied with the nation’s acceptable accounting principles. Further, for the 2017 fiscal year, there were no reports of non-compliance with applicable laws.
December 7, 2017
Greg Kaplan et al. posted The Housing Boom and Bust: Model Meets Evidence to SSRN. The abstract reads,
We build a model of the U.S. economy with multiple aggregate shocks (income, housing ﬁnance conditions, and beliefs about future housing demand) that generate ﬂuctuations in equilibrium house prices. Through a series of counterfactual experiments, we study the housing boom and bust around the Great Recession and obtain three main results. First, we ﬁnd that the main driver of movements in house prices and rents was a shift in beliefs. Shifts in credit conditions do not move house prices but are important for the dynamics of home ownership, leverage, and foreclosures. The role of housing rental markets and long-term mortgages in alleviating credit constraints is central to these ﬁndings. Second, our model suggests that the boom-bust in house prices explains half of the corresponding swings in non-durable expenditures and that the transmission mechanism is a wealth eﬀect through household balance sheets. Third, we ﬁnd that a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.
I think the last sentence is worth pondering a bit: “a large-scale debt forgiveness program would have done little to temper the collapse of house prices and expenditures, but would have dramatically reduced foreclosures and induced a small, but persistent, increase in consumption during the recovery.” During the Great Depression, the federal government took steps that relieved the debt burden of over a million households by extending the terms of their mortgages and lowering the interest rates on them.
While this was no panacea, it did let millions stay in their homes during a period of great financial stress. The steps taken to help struggling homeowners during the recent Great Recession were much more timid than those taken during the Great Depression. This paper adds to a body of literature that suggests we should not be so timid the next time we are hit by an economic tsunami.
- A banking institution joined the battle over the Consumer Financial Protection Bureau’s new leadership. Lower East Side People’s Federal Credit Union alleges Trump’s appointment of Mulvaney is an “illegal hostile takeover,” of the agency. Lower East Side People’s Federal Credit Union is a New York based credit union that believes Cordray’s appointment following his resignation is the sole legitimate leader of the federal agency. As a result, the credit union sued President Trump and Mulvaney.
- The Senate is hard at work attempting to revise and restructure the financial legislation in place during the Obama administration. The Senate’s newest effort is to repeal the Dodd-Frank Act. The Senate’s Banking Committee began a markup of a bill which will restructure the current rules and regulations of the financial industry. The bill is entitled, the Economic Growth, Regulatory Relief and Consumer Protection Act. According to critics, the bill eliminates imperative Wall Street and consumer protections.