I made a video two months ago talking about the tax reform bill that passed. In it, I was very concerned about its impact on the NYC Housing Market. Perhaps I was a bit overdramatic about it, given what I’m seeing, or not seeing, over January and February.
I’m quite excited that some of you have reached out to express your own concerns having watched the video. That said, the big questions are:
Are we really seeing an impact in New York City from the tax reform bill?
If so, where are we seeing it?
If so, why aren’t asking prices lower like they are seeing in the suburbs?
There’s a lot to talk about. First, are we really seeing an impact in NYC from the tax reform bill?
we’re trying to figure out what the new normal is
The short answer, yes. But it’s mostly indirect. I was concerned that lots of my clients would be directly impacted with a bigger hit on their taxes. That is- a higher tax liability. However, it appears that for most, the impact is mostly neutral. It seems that lower top marginal tax rates at higher brackets seem to offset fewer available deductions in real estate tax, mortgage tax deductions. So what are the indirect impacts?:
Mortgage rates: If mortgage rates continue to climb due to an improved economy- and it seems that mortgage rates will climb to a degree- buyers are making much more measured decisions on their purchases. Reduced purchasing power, which I did believe would be a big factor, will be one.
Inflation: As other things cost more, like education, healthcare, and labor, any purchasers running small businesses will be spending more money- and will have less to spend on their discretionary purchases. Even if the economy rumbles on, and purchasers see improved business, these are drags on their business- even if tax rates are lower. The actuality is that successful small businesses in our market already well exceed the levels at which people see reduced tax brackets on their businesses, so net net I expect buyers to power through these issues, if they want to continue to live in NYC.
Stock Market: The stock market has had a more bumpy start to the year than in 2017, but in all- as long as markets continue to move up- buyers may be unwilling to be the first to make a buying decision given they are making money, or seeing their portfolio improve. This will have a much larger impact, albeit indirect, than almost anything else. If the stock market has a sustained pullback, we could see the housing market with much more activity (at likely slightly lower prices than today), or, less likely, buyers may take a pause altogether.
Property Inventory: If sellers believe that there may be further reductions in capital gains taxes, they may hold their properties off the market to await some unknown tax improvement, and reduce the pool of available property. Since so few people could have predicted this tax reform passed in December, the uncertainty of future tax liabilities may create an continued artificially low inventory environment. Few people expected their taxes to go up with a Republican in the White House, and that stereotype remains. And while there does appear to be an increase of inventory across the board (see page 3 in our January NYC Property report), it is more due to sluggish buyer activity, aka slower pace of sales, with relatively few new properties hitting the market.
BIG PICTURE: There seems to be this very gradual slowing in the decision making process of buyers, more than something drastic as we’re seeing in the suburbs, where real estate taxes are so high. One client, who was deciding to buy in the city vs suburbs, wrote me: “Already in the suburbs I’ve noticed Spring 2018 listings at a ~10% discount to Fall 2017 listing prices. I haven’t really seen any obvious impact of tax reform on Spring listing prices in NYC. ”
Indeed. Since real estate tax is, relatively, much much lower in New York City, there is a muted impact from that. Second, the mortgage interest tax deduction is still meaningfully in place. It hasn’t been reduced so significantly that buyers seem to be freaking out.
It Comes Down to Manhattan and Brooklyn – and People Still Want to Live Here
In the end, buyers still want to live in the city, and a marginally increased tax bill hasn’t made most people run screaming for the suburbs, Florida, or elsewhere. The fact that prices are lower in the suburbs will probably keep buyers on track- those who already wanted to move. If there were any reservations about this move, the tax reform may actually DELAY some of these moves, and buyers may use this as an excuse to continue renting in Manhattan or Brooklyn. Of course, if municipalities can figure out how to reduce their real estate taxes, that will be a help. But tax reform on a city level is unlikely to be a short-term possibility in the areas around NYC.
Yes, buyers want to live in urban settings, more now than since the 1950’s. Empty nesters may get less for their suburban house, and therefore may not spend as much on their purchases in NYC, but they will continue to follow their dreams of moving back to the city. A vision of moving to Manhattan does not overnight become a vision of moving to Houston. Not for most people. Those moving away already had plans to do so.
Of course, there’s a chance that I’m wrong, and the market will come to a screeching halt. But it just seems like we’re finding a new normal. As rates increase, the concerns about reduced purchase power will probably balance out with small reductions in market values.
If the market dropped 20% at the depths of the Great Recession of 2008-2009, and prices have already come down at the high end over the last 24 months- expectations of a massive drop due to tax reform, especially with a stock market where it is- are likely founded more on fear (or buyer optimism) than reality.