There’s a new political party in charge in Washington, D.C., one that hopes to make some big changes in the U.S. economy, including tax reform. While the initial priorities of the Biden administration and Congress focus on mitigating the devastating impact of the pandemic, the new political dynamic could eventually create a shift in the luxury housing market.
“The luxury market has done very well in recent years thanks to low mortgage rates and to the performance of the stock market, which is influenced by politics,” said
chief economist for realtor.com in Washington, D.C.
Political actions have both a direct and an indirect impact on the housing market.
“We’ve never been at a time when the political landscape has continued to seem so uncertain,” said
CEO of Warburg Realty in New York City. “Politics has an effect on the stock market, which in turn has an effect on the luxury real estate market.”
While most of the Biden administration’s initial housing policies focus on the affordable housing crisis,
a partner with The Agency real estate brokerage in Los Angeles, said that the possible extension of the federal eviction moratorium beyond the current date of March 31 could have implications for the higher end of the housing market in the future.
“Most of our buyers are extremely wealthy and many of them own lots of property that they rent to tenants,”
said. “If policies are put in place that reduce their ability to collect rent on multiple properties, that could have a negative impact on their net worth and willingness to upgrade into more expensive properties.”
Another political issue that’s already had a major effect on luxury housing markets is tax reform.
Tax Reform and the Luxury Residential Market
The Tax Cuts and Jobs Act that went into effect in 2018 has several provisions, such as lower tax rates, a higher lifetime estate and gift tax limit, and a higher standard deduction that are set to expire at the end of 2025. Democrats are anticipated to address those expiring provisions and other tax issues eventually.
“Most of the tax reform ideas impact people with incomes above $400,000 and capital gains of more than $1 million, the demographic that matches our homebuyers,” Mr. Rufo said. “If everything was enacted, it probably wouldn’t mean that people won’t buy homes, but it could mean that they pause a little to consider their options.”
Some potential tax reforms include:
· Lifting SALT deduction limitations. The 2018 limitation on the deductibility of state and local taxes (SALT) to $10,000 was significant in markets like New York and California, said
who anticipates a positive impact on those tax-heavy locales if that limit is lifted by Democratic tax reform efforts.
“It’s not just a matter of money and getting a larger tax deduction, it’s also the perception,” he said. “It would make people feel less anxious about buying in states with higher taxes.”
In the Washington, D.C. area, where the luxury market mostly centers on homes priced between $1.5 million and $2.5 million, the SALT deductibility cap slowed the pace of sales, reduced luxury listings and reduced home buyers’ budgets, said
president and CEO of Long & Foster Real Estate in D.C.
“We saw $2 million homes sit on the market for a year or longer,” he said. “Now we have only a two-month supply of luxury homes because of migration trends and a frothy market in 2020. If the SALT cap is lifted, we’d see even more demand because those deductions directly impact the finances of our buyers.”
Migration trends after the SALT cap meant that more people left high-tax states to move to lower tax states like Florida and Texas.
“If your SALT deductions aren’t limited, then you can be agnostic over where you live,” said
executive mortgage banker with William Raveis Mortgage in New York City.
· Higher income tax rates. Increasing…