New Tax Plan and its effect on NJ Real Estate

As a stats-nerd I started some research to try to get a sense of the impact we might see from the new tax law to try to predict how and where we might see impacts. In going through it, this is a little more difficult that simply crunching some numbers, which I’ve definitely done. This tax law has a number of moving parts. Firstly, it caps the write off for state and local taxes at $10,000, which in New Jersey is a very big deal for anyone who itemizes their deductions. Very often, property taxes on a single property do exceed that figure on their own. The other portion, which primarily will affect high priced communities is the cap on mortgage interest deductions on loan amounts above $750,000, as well as the elimination of home equity loan mortgage interest as a deduction.  It’s a little unclear exactly how the specifics will work on this calculation when tax time comes. The effect is going to be very much individualized, especially given the positive impacts such as raising standard deductions, and more favorable treatment for business owners and the self employed.

Overall these things seem like they will have the potential to create some behavior changes on the margin at least. I’m still trying to gather data to try to predict better, but right at the outset, I can see some possibilities:

  • High end shore communities
  • A whack to the high end markets, especially those in high tax counties such as Essex and Bergen
  • Price compression

Shore Communities: I think the biggest impact we might see overall in NJ is an impact on activity and pricing in high end shore communities, those where the typical buyer is purchasing a 2nd/vacation home. The reason for this is the stacked effect a homeowner with two or more homes in NJ is going to feel. While it is a generality, often the households with a shore/vacation home will be relatively well off. Perhaps if that individual owned one home, the effect of the new tax plan might be negligible or reduced. However, if are an upper middle class homeowner with two NJ properties, it isn’t going to be very hard to go above the the new limits on SALT (state and local taxes) and mortgage interest. Basically, it just got a lot more expensive for a well off New Jerseyan to buy a 2nd home at the shore. Many buyers will have those deductions eaten up by their primary home. This will probably translate to fewer owners with a single NJ residence making the decision to buy a 2nd high priced home in shore communities. This will probably be felt especially at the top end of the price ranges within those communities, but will also probably result in at least slightly lower activity in all price ranges once this all settles in.

High End: The high end market in NJ still continues to experience some softness and probably didn’t need another event to cause some hand-wringing, especially now, in a moment where a heating up economy might just help get some of those old listings into the sold category and drive some positive momentum. This might be seen in some of the high tax but more moderately priced communities in Essex and Bergen especially; where the highest priced homes might carry annual tax figures of $20,000 or more.

Price Compression: Price compression is a phenomenon which we’ve been seeing for a while now because of oversupplied top end price segments in many of the prime high end markets. Effectively, this is caused by the high end homes which might have sat on the market for a long time getting a price reduction in an area where the market for low and moderately priced homes is very strong. Once upon a time, the top end homes might have sold for 150% of the median priced homes, but because of sustained oversupply at the top, the gap narrows, affecting pricing in lower tiers as well as the market reacts to the new price paradigm at the top. I think we might see this in some of the high tax communities as well.

The other aspect of this is an economy which is heating up and a stock market which is making new highs regularly. The NJ labor market continues to be very robust and looks to continue to improve. This makes for a complicated puzzle which is difficult to solve; will improvements in wages, wealth and income gloss over some or all of the shortcomings of this new law in NJ? It’s very hard to say and something which is going to have to be observed.

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