– The House of Representatives’ tax reform plan proposes doubling the standard deduction while capping the mortgage interest deduction (MID) to the first $500K of mortgage debt
– All else being equal, as a result of doubling the standard deduction, renters would likely see greater overall tax benefits than homeowners who previously had itemized deductions
– As part of the plan, current borrowers would be exempt from the $500K MID cap, which may create a disincentive for homeowners to sell their homes and sacrifice the larger existing deduction, further tightening available housing inventory
– Prospective home buyers with new mortgages over $500K could see costs rise an additional $2,600 – $4,200 per year depending on their tax bracket, even if interest rates stayed flat
– Proceeds on nearly 15% of existing home sales may also face increased capital gains exposure, which could further constrain for-sale inventory
The Data and Analytics division of Black Knight, Inc. released its latest Mortgage Monitor Report, based on data as of the end of October 2017. Given the significant impact proposed changes to the tax code could have on the housing and mortgage markets, this month Black Knight explored the impact from the Senate and House versions of tax reform as currently written. As Black Knight Data & Analytics Executive Vice President Ben Graboske explained, proposed changes to the standard deduction, mortgage interest deduction (MID), and capital gains exemptions in particular could put even more pressure on already limited available housing inventory, with ramifications for both current homeowners and prospective buyers. “Both tax reform proposals double the standard tax deduction, which may, in many cases, provide a greater benefit to renters than to homeowners,” said Graboske. “It may also reduce the tax incentive to purchase a home and generally make the MID less valuable to borrowers. We’ve observed in the past that positive tax incentives can certainly impact home buying decisions – the Black Knight Home Price Index showed clear evidence of this as a result of 2008’s first-time homebuyer tax credit. However, limited data is available to examine the effects of removing an existing tax incentive on borrowers’ purchase behavior. One thing that seems clear is that a reduction of the MID could further constrain available housing inventory, which itself has helped to push home prices even higher in many places. Almost 3 million active first-lien mortgages – current mortgage holders – have original balances exceeding $500K – the cap proposed in the House version of the tax bill. These borrowers would be exempt from the limit. We’ve already seen signs of ‘interest rate lock’ on the market, as homeowners with low interest rate mortgages have a disincentive to sell in a rising rate environment. The question now becomes whether the proposed tax reform adds another layer of ‘tax deduction lock’ on the market. Do these homeowners now also have a disincentive to sell their home in order to keep their current interest rate deduction of up to $1 million? If so, this would potentially add new supply constraints.
“Lower-priced markets may see little effects from these changes, but the most recent Black Knight Home Price Index shows 22 markets nationwide where the median home price is over $500K. Mortgage originations at or above that point have increased by 350% since the bottom of the housing market. At the current rate of growth, we could see approximately 480,000 purchase originations in 2018 with original balances over $500K, with an estimated 2.9 million over the first five years of the tax plan. If home prices continue to rise and the cap is left in place, more families in the upper-middle income range could be impacted. Even if interest rates stayed steady around four%, a $500K MID cap could cost the average homeowner with a larger mortgage an additional $2,600 – $4,200 per year depending on their tax bracket, representing a 6 to 10% increase in housing-related expenses as compared to the average annual principal and interest payment today.”Black Knight also found that proposed changes to the capital gains exemption on profits from the sale of a home (requiring five years of continuous residence as compared to the current two) could impact approximately 750,000 home sellers per year, also potentially increasing pressure on available inventory. Leveraging the company’s SiteX property records database, Black Knight found that on average, over the past 24 months, more than 14% of property sales were by homeowners falling into that two-to-five-year window and who would no longer be exempt from capital gains taxation. On average, $60 billion in capital gains each year could be impacted, with a worst-case scenario (taxing the full amount under the highest tax bracket) putting the cost to home sellers at approximately $23 billion. If such homeowners choose to forego or delay selling to avoid a tax liability, this may also further reduce the supply of homes for sale.
As was reported in Black Knight’s most recent First Look release, other key results include:
- Total US loan delinquency rate: 44%
- Month-over-month change in delinquency rate: 0.94%
- Total US foreclosure pre-sale inventory rate: 0.68%
- Month-over-month change in foreclosure pre-sale inventory rate: -2.84%
- States with highest percentage of non-current loans: MS, LA, FL, AL, TX
- States with the lowest percentage of non-current loans: MT, MN, OR, ND, CO
- States with highest percentage of seriously delinquent loans: MS, LA, AL, AR, FL
Dow opens at new record high, after Senate green-lights tax bill
US stocks jumped at the opening bell, with the Dow Jones Industrial Average adding 238 points, or 0.98% to reach 24,464 points in the first minutes of trading. Stocks were boosted by optimism over tax reform after Senate Republicans passed an overhaul of the US tax code early Saturday, which shifted investors’ minds away from political tensions in Washington and sent stocks on a wild ride on Friday. The Dow industrials could log a new closing record for Monday if the indicated gains come through. Last Thursday, the Dow posted its biggest one-day gain in a year, surging more than 330 points to close above 24,000 for the first time. It was the fifth 1,000-point milestone for the Dow in 2017, the most ever in a calendar year. Then, on Friday, the Dow had its most turbulent session of the year, plunging after former national security adviser Michael Flynn pled guilty to lying to the FBI about conversations with a Russian ambassador. An incorrect ABC report said Flynn would testify that President Donald Trump directed him to make contact with Russian officials while he was a candidate contributed to a steep fall in socks. ABC later clarified and corrected the story, which was reported on air.The Dow’s steep losses were short lived, with stocks paring their losses during the session. The index closed down 40.76 points after falling as much as 350 points during the session.
CoreLogic – shows more than 20% of us properties at risk of flood are outside of designated special flood hazard areas
– Florida has the most properties with flood risk that are not included in special flood hazard areas, Arizona has the highest percentage
According to new data analysis from CoreLogic, an estimated 23% of residential and commercial properties in the US are at High or Moderate risk of flooding, based on CoreLogic proprietary flood analysis, but are outside of designated Special Flood Hazard Areas (SFHA) as identified by the Federal Emergency Management Agency (FEMA). Property owners living within SFHA zones must have flood insurance if there is a federally insured mortgage while those living outside SFHA zones are not required to have flood insurance. Many property owners choose not to carry flood insurance if it is not required even though their property may still be at risk of flood. Nationally, more than 29 million properties (29,437,151), or 23%, are outside a designated SFHA despite being at High or Moderate risk of flooding, according to CoreLogic analysis. At the state level:
– Florida has the highest number of properties in this category at 5,055,821, or 54% of total properties
– Texas has 3,292,082 properties, or 31%, and California has 3,114,462 properties, or 29%
– Looking at only the percentage of properties outside an SFHA, which are at High or Moderate risk, Arizona has the highest at 68%, followed by Florida at 54% and Louisiana at 49%
Oil prices fall after US drillers add rigs
Oil fell on Monday after US shale drillers added more rigs last week, but prices still held close to their highest since mid-2015, supported by an extension to output cuts agreed last week by OPEC and other producers. Drillers in the United States added two oil rigs in the week to Dec. 1, bringing the total count to 749, the highest since September, energy services company Baker Hughes said in its closely followed report late on Friday. February Brent crude futures were down 54 cents at $63.19 a barrel by 1003 GMT, while US West Texas Intermediate was down 61 cents at $57.75. The Brent price hit a two-year high of $64.65 a month ago and has since attracted record investment by fund managers. The US rig count, an early indicator of future output, has risen sharply from 477 active rigs a year ago after energy companies boosted spending plans for 2017. Drillers were encouraged during 2017 to increase activity as crude prices started recovering from a multi-year price slump after the Organization of the Petroleum Exporting Countries (OPEC) and some non-OPEC producers, including Russia, agreed to production cuts a year ago. Last week the producers agreed to extend those cuts of 1.8 million barrels per day (bpd) until the end of next year. “Market reaction has been positive so far. There are only two worrying aspects … one is that Iraq’s indiscipline has not been discussed, at least not publicly,” PVM Oil Associates strategist Tamas Varga said, referring to Iraq’s poor compliance with the deal.
MBA applauds Senate for inclusion of rounds amendment in tax bill
David H. Stevens, CMB, President and CEO of the Mortgage Bankers Association, offered the following statement praising efforts by Senate Leadership, Senator Mike Rounds (R-SD), Senate Finance Committee Chairman Orrin Hatch (R-UT), Senate Banking Committee Chairman Mike Crapo (R-ID) and Senator David Perdue (R-GA), to address language in Section 13221 of the Senate Tax Reform Bill relating to mortgage servicing rights (MSRs). “I want to personally thank Majority Leader McConnell, Chairman Hatch, Senator Rounds, Chairman Crapo, and Senator Perdue for working with us and commend them for their efforts on this important issue. Because of the Rounds Amendment, this package will protect the ability of most Americans to obtain safe, decent shelter and affordable home mortgage credit without disruption. Had this language not been included, the change in tax accounting for MSRs would have had a devastating impact on the flow of capital that supports a robust and competitive real estate finance market, both single-and commercial/multifamily. We thank the Senate for its leadership on this issue.”
NAR – Senate-Passed tax legislation bad news for homeowners
The US Senate today passed tax reform legislation that the National Association of Realtors® believes puts home values at risk and dramatically undercuts the incentive to own a home. NAR President Elizabeth Mendenhall, a sixth-generation Realtor® from Columbia, Missouri and CEO of RE/MAX offered strong concerns over the bill and said Realtors® will continue to work with members of the House and Senate as the process moves forward into a conference committee. “The tax incentives to own a home are baked into the overall value of homes in every state and territory across the country. When those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10%, and even greater in high-cost areas. “Realtors® support tax cuts when done in a fiscally responsible way; while there are some winners in this legislation, millions of middle-class homeowners would see very limited benefits, and many will even see a tax increase. In exchange for that, they’ll also see much or all of their home equity evaporate as $1.5 trillion is added to the national debt and piled onto the backs of their children and grandchildren. “That’s a poor foot to put forward, but this isn’t the end of the road. Realtors® will continue to advocate for homeownership and hope members of the House and Senate will listen to the concerns of America’s 75 million homeowners as the tax reform discussion continues.”