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The housing industry has expressed its concern over changes in House and Senate tax bills that would affect the incentives for homeownership.
Among the headline proposals is limited the mortgage interest deduction for properties to the first $500,000 of principal, rather than the first $1 million.
What’s the problem, many wondered, about a tax break that appeared to be headed to the wealthy with luxury homes of more than $500,000?
The impact of the proposal, however, could have a much wider reach than anticipated.
An analysis of data by Black Knight conducted for The Title Report found that nearly 3 million of the 51 million active mortgage loans had an original balance of $500,000 or more. That includes 785,000 such mortgages originated in 2016, with an additional 600,000 expected to be originated this year.
More than 1.3 million of those active mortgages with original balances of more than $500,000 were originated in California, nearly half (46.4 percent) of all the state’s active loans. In New York, more than 334,000, or 11.5 percent of all active loans, had original loan balances of more than $500,000.
At the metropolitan statistical level, the numbers stand out even more. Black Knight compiles the average price of actual sales activity of arms-length closed transactions in its Home Price Index (HPI).
In a number of areas, the HPI for homes is near or above the $500,000 level – meaning a home at that price is not a luxury jumbo home, but simply representative of an average house in the market.
In Los Angeles, the HPI last month was $654,000. In San Diego it was $583,000. Further north in San Francisco it was $844,000, and in San Jose, a staggering $1.015 million.
In New York it was $473,000, in Seattle it was $471,000, in Boston it’s $463,000, and in Washington D.C. it’s $412,000. Sacramento, Calif. ($397,000), Denver ($392,000) and Portland, Ore. ($388,000) are not far behind.
“These are big numbers. In California alone it’s 1.3 million,” Black Knight Senior Vice President of Data and Analytics Division Ben Graboske said. “It’s plausible that home price appreciation will continue, and you’ll be looking at a greater number of metros with average home prices at or above $500,000. If we see 5 percent appreciation for a few more years, the effective numbers could become larger.”
The tax proposals being considered by the House and Senate would include provisions to take effect over at least the next decade. If they cannot be paid for under Senate reconciliation rules, they would have to sunset over 10 years.
However, for metropolitan areas where the average homes are going for $400,000 now, it’s not difficult to see scenarios where the average home price over the next five to 10 years rises beyond $500,000.
“Consider these 3 million homes, and think about the price trough we had in 2012. We’re back to historic norms now. But that 3 million is applied to a period where the housing market in general has been underpriced,” Graboske said. “It really comes down to what your home price forecast is. If you assume five more years of 5 percent appreciation, and then you look at the metros that are near that $500,000 cutoff, this 3 million number would grow quite a bit.”
Graboske said a scenario of 785,000 homes of $500,000 or more being originated, as happened in 2016, might be a little unlikely. This year’s trend, however, could be used.
“You factor in 2017 at 600,000, with rates that are more in line with long-term norms … I think that’s a good proxy,” he said.
That could add another 3 million new loans with original balances of $500,000 or more over the next five years, driving the mortgage interest deduction to affect more average homebuyers in more markets than many might expect.
Among the places where that growth would be expected is in Washington state. Washington currently has the seventh-most active mortgages with original balances of $500,000 or more, according to Black Knight. That equals just shy of 3 percent of all active loans in the state.
However, last year, Washington had 3.5 percent of its loans originated at or above $500,000, showing growth on the higher end.
“Washington state has been in the top three in home price appreciation for the better part of the last couple of years,” Graboske said.
Among the other top states with current mortgages having original loan balances of $500,000 are Virginia (3rd, 146,623), New Jersey (137,476), Florida (91,266), Maryland, Washington, Illinois, Texas and Massachusetts.”