Republican Tax Plan Would Slam California Housing Market

By Laura Kusisto Features Dow Jones Newswires

California's biggest housing markets figure to be among the losers if a Republican-sponsored tax overhaul becomes law, according to two analyses of local market data.

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The bill would cap the size of mortgage loans for which taxpayers can deduct interest payments at $500,000. In most regions of the U.S., that represents a small fraction of properties.

But in the priciest markets, concentrated in some of the nation's largest coastal cities, the impact could be significant. In the San Jose, Calif., metropolitan area, 75% of new mortgage loans thus far in 2017 were for more than $500,000, according to an analysis by CoreLogic Inc., a housing data provider. The median home price there is more than $1 million, and even small starter homes can climb well above the proposed cap.

In the San Francisco metro area, 60% of new loans were for more than $500,000, while in Los Angeles and San Diego, the figures were 44% and 37%, respectively.

The impact wouldn't be limited to California. In Honolulu, 48% of loans were greater than $500,000, while the figures for the New York area and Seattle were 22% and 25%, respectively.

An analysis by ATTOM Data Solutions yielded similar results. In the Washington, D.C., area, 35% of purchase and refinance loans in 2017 thus far were for more than $500,000. In Hawaii, 15% of loans fell into that category, while in California 12% did.

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In addition to capping the mortgage interest deduction, the bill also limits the amount of property taxes that households can deduct to $10,000 annually. That also could hit parts of California hard, where some homeowners pay many times that, as well as several other strongly Democratic states.

Most economists say the mortgage interest deduction doesn't act as a significant incentive for homeownership and helps drive up home prices by encouraging buyers to purchase more expensive homes. Realtor groups say the deduction acts as an incentive for middle-class families.

Jeff Barnett, a California realtor and vice chairman of the National Association of Realtors' large-firm real-estate services committee, said his area will be hit "very, very hard" if the tax bill passes. Even if corporate tax cuts help boost the economy, he doesn't think that will be enough to compensate.

"You've taken away so many incentives for housing, they can't spend" the money from any extra economic growth, he said.

Of course, broad swaths of the country will see little impact from the changes to the mortgage interest deduction. Even in Portland, Ore., which has seen prices rise significantly in recent years, only 6% of mortgages so far in 2017 were over $500,000. In Austin, Texas, just 5.6% of loans were over that figure, and in Chicago 5.5% were.

Write to Laura Kusisto at laura.kusisto@wsj.com

(END) Dow Jones Newswires

November 08, 2017 05:44 ET (10:44 GMT)