Political Power Shift Could Generate Changes in the U.S. Luxury Housing Market

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 Danielle Hale, 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 Frederick Peters, 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, Marco Rufo, 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,” Mr. Rufo 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 Mr. Peters, 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 Jeff Detwiler, 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 Melissa Cohn, executive mortgage banker with William Raveis Mortgage in New York City.

· Higher income tax rates. Increasing income taxes always has a negative impact on the luxury market, Ms. Cohn said. However, she doesn’t expect tax rates to rise in the near future.

“The pandemic changed everything, and the focus now is on rebuilding the economy. So even if the Democrats want to raise taxes eventually, now is not the time,” she said.

An increase in tax rates for high earners probably won’t take buyers out of the market, said Mr. Detwiler, but it could reduce their price point by several hundred thousands dollars or more.

“The good news about tax reform that would cause wealthier people to pay more is that it would be a federal issue that people can’t escape by moving to Florida,” Mr. Peters said.

· Higher capital gains tax rate. While home sellers can exclude up to $250,000 in profit if they’re single and up to $500,000 if they’re married from a capital gains tax on their primary residence, an increase in the long-term capital gains tax rate could still hurt the luxury housing market. Currently, the highest capital gains tax rate is 20%.

“If the capital gains tax rate is increased, that could have negative repercussions,” Ms. Cohn said. “People wouldn’t want to sell their homes, especially if they hoped the rates would roll back again in the future, and that would limit the supply of homes.”

Mr. Detwiler said he thinks a higher capital gains rate could have a bigger impact on the second-home market. Currently, the long-term capital gains tax rate depends on your income and is either 0%, 15% or 20%. Single taxpayers who earn $441,450 or more and married taxpayers who earn $496,600 pay the top rate.

“Sellers have to pay capital gains taxes on the profit of the sale of a home that’s not their primary residence,” Mr. Detwiler said “In addition, if people have to pay more taxes on other gains, that shrinks their portfolio and changes how much they’ll want to pay for a house.”

· Elimination of 1031 Exchange option. A 1031 Exchange allows investors to swap one property for another and postpone paying capital gains tax on the sale until you sell the next property.

Without the 1031 Exchange, investors would have less money to put into their next deal, Ms. Cohn said.

“Getting rid of the 1031 Exchange would have a direct impact in our area because we have a lot of luxury rentals at $40,000 to $50,000 a month in Los Angeles,” Mr. Rufo said. “Owners of these properties would pull back from buying and selling them if they had to pay capital gains on the transaction, and that would have a direct impact on property values.”

Broader Impact of Politics on the Housing Market

Real estate market performance is tied to the fundamentals of supply and demand, which can also be influenced by political policies, realtor.com’s Ms. Hale said. (Mansion Global is owned by Dow Jones. Both Dow Jones and realtor.com are owned by News Corp.)

“Demand is based on income and consumer confidence,” Ms. Hale said. “If wealthy households see their income go down due to a higher tax burden, it’s conceivable that their spending could decline and that would impact the housing market.”

However, a growing economy, especially one that drives stock gains, could mean after-tax incomes are higher for wealthy households, she said.

“The way politics matters the most is how it makes people feel,” Mr. Peters said. “As real estate agents, we’re selling people a belief in their future. That’s a lot harder to do when people feel freaked out by the present. They’re less likely to take on large financial commitments when they’re concerned about the future.”

Personally, Mr. Peters is optimistic about the impact of the new power configuration for his market in New York.

“It’s not entirely irrelevant that the new Senate majority leader [Charles Schumer] is from New York,” he said.

Source: realtor.com

Home Movers Flocked to Decisive Battlegrounds Ahead of 2020 Election—Many Came From Blue States

In hindsight, Donald Trump could have looked to his own industry for clues about how the November election might unfold.

Throughout his presidency, a steady migration of home buyers was underway from blue-leaning to red-leaning regions, some of which played a decisive role in the 2020 election. Waves of Los Angelenos and New Yorkers, for example, have hunted for homes in swing state metros like Atlanta and Phoenix, search data over the past few years shows, and likely played some part in shifting the electoral map.

“The biggest trend that we see is people from large populous dense states—and New York and California are prime examples—moving to places that are less dense,” said Danielle Hale, chief economist at listing portal realtor.com.

Between mid-2017 and October 2020, nearly half of all house hunters searching in the Phoenix area, for example, were from out of state, with the biggest cohort from Southern California, according to search traffic on realtor.com. To be precise, one in eight views across Maricopa County listings was a person based in Los Angeles County.

The county, Arizona’s most populous, played a pivotal role in flipping the state blue for the first time in 24 years in November and handing President Joe Biden 11 more electoral votes. Ultimately, Mr. Biden recaptured a county that Mr. Trump won by about three percentage points in 2016, according to Wall Street Journal election results.

The influx of home buyers resettling from cities around the West Coast likely played some role in the state’s liberal shift, said Kelly Khalil, a Phoenix-based agent with Redfin.

“We’ve always been a purple state, now we’re looking blue,” Ms. Khalil said. “We have a lot of money coming in from Oregon, California, Washington, and they’re kind of changing the politics.”

The changing atmosphere is so visceral that it’s not uncommon to see T-shirts or bumper stickers plastered on trucks with the slogan: “Don’t California my Arizona,” the agent said.

Orange County, California, just south of Los Angeles, and Cook County, Illinois, home to deep-blue Chicago, rounded out the top three regions driving search traffic to Maricopa listings. And there’s no sign migration from such locations is letting up in Phoenix, a trend that may have long-term political implications.

“It’s inevitable to see some changes to the political landscape when you have that many people relocating from other, often more liberal, parts of the country,” Ms. Khalil said.

Luxury agents in Atlanta saw the stream of out-of-state interest in their own market surge in 2020.

A booming film industry and corporate moves into the city have drawn a growing cohort of house hunters from the Northeast and West Coast, and the Covid-19 pandemic has only accelerated movement to a market where buyers can get more space and land for their money, said Debra Johnston, an Atlanta-based luxury agent with Berkshire Hathaway HomeServices.

“I have not stopped working really at all price points,” Ms. Johnston said.

“Before the pandemic, we were just starting to see some out-of-state buyers move into the Atlanta area,” she added. “Now it’s really gone into overdrive.”

She estimated she’s working with 50% more out-of-state buyers than she was a year ago.

Fulton, home to Atlanta, and its surrounding counties became an hour-by-hour news story, as absentee ballots were slowly tallied in the days after election night. The region, the state’s liberal nebulous, was instrumental in handing Mr. Biden his razor-thin 0.24% win in Georgia. Democrats also won both of Georgia’s Senate run-offs earlier this month.

While the area was already left-leaning, Mr. Biden won Fulton County by nearly 6 more points than Hillary Clinton, and the Democratic gains in neighboring Cobb and Gwinnett counties were even more dramatic—part of what pundits have coined the “suburban revolt” against Mr. Trump.

Ties to Los Angeles and New York have certainly strengthened with the city’s growing entertainment industry, which has earned Atlanta the moniker “the Hollywood of the South,” Ms. Johnston said.

Many have even brought their West Coast tastes with them, scouring the Atlanta area for newer development with the kinds of amenities, like walk-out poolside terraces, typical of Southern California homes, she said.

“There is an expectation for a newer, fresher, more transitional style,” she said.

Still, it’s a little harder to intuit how the wave of newcomers will shake out in Georgia politics; and there’s certainly a cohort of affluent newcomers who are choosing the state for its more conservative, business-friendly environment, she added.

From August 2017 up until November 2020, roughly one-third of all listing views in Fulton came from out of state. But the Atlanta area—unlike Phoenix and Las Vegas, where Los Angelenos dominate the market—attracts a far more diverse set of buyers from out of state. Los Angeles tops the list, but still accounted for only 3% of out-of-state home shoppers in Fulton County, which also drew significant interest from people in Miami, Chicago, North Carolina and New York City, according to realtor.com search data.

Las Vegas proves that a wave of incomers from blue states does not necessarily yield a Democratic shift.

Los Angelenos have dominated the housing market in Las Vegas, accounting for one in five listing views across realtor.com from August 2017 until November 2020. And yet, the city’s greater Clark County did not make the kind of sharp left turn Phoenix did. Instead, the final tally showed Mr. Trump doing slightly better there than in 2016.

“Maybe these are people who are relatively conservative,” Ms. Hale said, noting a realtor.com survey in the fall that found that a majority of Americans thought it important to live in a place where people shared their political views. (Mansion Global is owned by Dow Jones. Both Dow Jones and realtor.com are owned by News Corp.)

Another migration magnet Austin, Texas, has seen a flood of interest from San Francisco and Silicon Valley transplants in recent years. Travis County, of which Austin is the seat, was already the state’s liberal focus, but it and its surrounding suburbs shifted significantly more Democratic in the 2020 presidential vote than in 2016.

Mr. Trump ultimately won Texas by five points, but fast-growing metros like Austin are helping turn the Republican stronghold into a swing state.

“People say God misplaced Austin in Texas,” said Kathryn Scarborough, a luxury agent with Engel & Volkers. “Austin is a blueberry in a big red apple.”

The county’s growing tech industry has spurred an influx of home buyers from California. From August 2017 until November 2020, around 30% of all traffic to Travis listings came from out-of-state, with Los Angeles and Silicon Valley’s Santa Clara topping the list of out-of-state views, according to realtor.com.

But demand from out of state accelerated sharply in 2020, as more people fled the dense areas in and around San Francisco.

“I definitely have never seen the level of millionaire and billionaire clientele that we are now,” Ms. Scarborough said. Outsized budgets have caused median sales prices in the city to soar and are pushing home values out of reach of local buyers, she said.

“They’re coming in droves: a lot of New York, a ton from Silicon Valley and a lot of people from Orange County, but mostly from the Bay Area,” she said.

Despite their origins, some of her out-of-state buyers have skewed conservative, so Ms. Scarborough can’t predict how the booming migration might change Austin’s politics, she said. “We’ll see what happens with that.”

Source: realtor.com

U.S. Sees Rise in Appetite for Single-Family Homes—Especially of the Luxury Variety

The appetite for high-end single-family homes is surging across the U.S., according to a report Thursday from real estate data provider HouseCanary.

Between the start of the coronavirus pandemic in March and the end of November, the number of single-family detached homes priced above $1 million to have entered contract jumped 28.8% compared to the same period last year.

The increasing popularity for luxury homes was followed closely by those priced between $600,000 and $1 million, which have seen their contract numbers increase 26.3% over the same time, the report said.

On the flip side, single-family homes priced below $200,000 have seen contracts fall by 13.7% compared to last year.

The data underlines the increasing desire for buyers to upgrade to larger homes with more amenities. Now spending more time at home and frequently working remotely, homeowners are realizing they’re in need of more square footage, home offices and outdoor space, features that often come with a steeper price tag.

Despite their surging popularity, $1 million-plus home sales only represent a fraction of the overall market, with most contracts being recorded on homes in the $200,000 to $400,000 range, according to the report.

“We anticipate that the housing market will maintain the status quo through year-end, but there is strong potential for a significant shift in the new year,” Jeremy Sicklick, co-founder and CEO of HouseCanary, said in the report, pointing toward the transition of White House leadership and Congressional appointment decisions.

“For now, outsized demand from home buyers is motivating sellers to maintain active listings and pushing prices on closed listings to record highs across the country,” he said. “Despite a turbulent election and a seasonal slowing of housing market activity, elevated demand levels continue to drive the housing market’s recovery and have largely offset the steep drop-off in new listings, contracts and closures observed recently.”

Source: realtor.com

U.S. Housing Market Takes a Breather But Stays Hot

The juggernaut that has become the U.S. housing market finally paused to take a breath last week. But even with buyers and sellers taking a step back temporarily, the industry remained hot.

During the week ending Nov. 7, both buyers and sellers averted their attention from relocations and instead focused on current events, according to Thursday’s report from realtor.com.

“Between the presidential election [on Nov. 3] and a new wave of coronavirus cases, buyers and sellers had a lot of reasons to pause last week,” Danielle Hale, realtor.com’s chief economist, said in the report.

Sellers avoided putting their homes on the market, with the number of new listings last week dropping from an already low point, the report said.

New listings were down 12% annually during the week ending Nov. 7, worse than the prior week’s decrease of 9% and a significant fall from the week ending Oct. 24, when newly listed homes were down just 2% compared to the same time in 2019.

A steady supply of new listings is crucial for home sales, and they’ll need to make a strong comeback for housing activity to continue, the report said.

Due in part to the lack of new listings hitting the market last week, the total number of homes for sale recorded a dip too, with total inventory across the U.S. now 39% below last year’s levels.

The speed in which homes are changing hands as well as listing price changes held steady last week with no drastic gains, but both metrics continue “to signal a tight market,” the report said.

With buyers competing for limited inventory, the homes that are available are selling fast. Last week, the average time a property spent on the market was 13 days faster than a year ago, marking the seventh consecutive week that homes are selling 13 or 14 days faster than they did in 2019.

For the 13th week running, listing prices logged double-digit growth, up 12.9% over last year. This latest increase is on par with the 12.2% growth that was recorded in October, when the median listing price reached $350,000.

“The big question is whether both buyers and sellers will jump back into the market after last week’s break,” Ms. Hale said.

“With mortgage rates expected to rise on news of a likely vaccine, buyers may have reason to jump back in and find a home sooner rather than later, but sellers may be more inclined to stay on hold. Thus, even as overall activity slows, we may very well see continued price growth and quick sales,” she added.

Mansion Global is owned by Dow Jones. Both Dow Jones and realtor.com are owned by News Corp.

Source: realtor.com

Homes in Wildfire, Flood-Prone Areas Appreciate Slower

Prices for homes in historically fire-prone areas have appreciated at a slower rate than those without risks, according to an analysis by realtor.com released Monday.

So far in 2020, prices for homes at risk of wildfires have increased 2.9% year-over-year, compared to a 5.2% rise for homes without wildfire risks, the data from realtor.com shows.

Over a five-year period, the gap averaged three percentage points. Between 2014 and 2019, the prices of homes in California within a one-mile radius of historical fire perimeters increased 32%, compared to 35% for other homes in the same county, according to the report.

For homes located in coastal areas that are at risk of flood, prices also increased slower than those without risk.

Over the past five years, sale prices per square foot for homes with severe or extreme risk of flooding in 78 coastal counties that had hurricane-related disaster declarations rose 25%, compared to 30% for homes with a minimal or low risk, according to the report.

“As the impacts of climate change and worsening natural disasters become more well-known, it’s natural for home shoppers to take these factors into account when deciding the purchase price of a home,” Danielle Hale, chief economist at realtor.com, said in the report.

Additionally, the impact of flood risk on home prices is getting more pronounced over time. In 2014, 33 of the 78 counties studied saw slower price growth for high-risk homes, while in 2019, this was true of 40 counties.

The trend was most pronounced in Delaware, Florida, Massachusetts and Maryland, according to the report.

Mansion Global is owned by Dow Jones. Both Dow Jones and realtor.com are owned by News Corp.

Source: realtor.com