Despite initial concerns, 2018 tax changes haven’t hurt residential real estate prices

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Aloha Capital had another productive month of private lending in July. All Aloha loans are collateralized by single & multi-family residential real estate, first position liens and personal guarantees by sophisticated real estate investors. Since inception, Aloha has originated over 600 loans, with $65 million of face value. We are currently operating in twelve states.

Late last year there was some hand-wringing by professionals in the real estate industry that proposed tax law changes would be negative for the U.S. real estate markets. 

“The direct result of these changes,” the National Association of Realtors told members of Congress in a letter in November, “would be a plunge in home values across America in excess of 10 percent, and likely more in higher cost areas.” It’s been nine months since the tax changes were enacted, and what has happened residential real estate prices?

Yes, they’ve changed 10% — real estate prices are up over 10% nationally year-to-date through July, according to Redfin. It seems that home buyers in the U.S. are not worried about tax changes.
2018 Median Sales Prices – selected markets

Source: Redfin Among the real estate-related changes passed into law by congress: 

  • The Mortgage interest deduction was limited. The new tax law reduced the maximum amount of mortgage debt you can deduct interest on your taxes to $750,000 from $1 million. 
  • Deductions on state and local property taxes were limited. Homeowners may itemize deductions of up to $10,000 for the total payment of state and local property taxes. Previously, all state and local property taxes were deductible in the federal tax filing without limit. 
  • Standard deductions increased. The standard deduction for taxpayers doubled under the new law, to $12,000 for individuals and $24,000 for joint filers. This change will likely lead many taxpayers to take the standard deduction rather than itemize their filing.

 As we noted late last year, Nobel Prize Winner Robert Shiller said in a CNBC interview that he didn’t think home prices would fall if the limit on the amount of mortgage debt one can deduct was cut in half. He also pointed out that historically home prices haven’t reacted “at all predictably to changes in things like interest rates.” The only change having much impact on the U.S. residential market, according to a detailed analysis by Zillow, is the limitation on deductions for state and local tax, or SALT for short. And the impact itself is, so far, both slight and largely limited only to select areas.

According to Zillow, “controlling for common trends across markets, there has been somewhat slower growth in home values attributable to tax reform in ZIP codes with high shares of homeowners that historically used the SALT deduction, compared to those areas with less usage historically.” In the top 10 percent of areas that make use of the SALT deduction, growth in home values have slowed by about 0.6 percentage points since the law took effect. At the median, growth has slowed by about 0.3 percentage points. The bottom 10 percent haven’t seen any slowdown.

These are very modest effects. So, least for now, the tax laws enacted in December 2017 have been a very modest headwind to home value growth. And per the table above, Aloha’s key markets have continued to appreciate nicely in 2018. Aloha Fund posted another solid month in July. The Fund has ample deal flow, has been growing consistently, and is actively seeking new capital.

Please reach out with your questions and interest in working with Aloha Capital in this excellent, income-producing investment.

We greatly appreciate your patronage and trust.

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