To rent or own? Federal tax plan could tip the balance
Changes in the federal tax law could complicate another equation for Bay Area residents — whether to rent or own.
A study by researchers at the Urban Institute, a social and economic policy think tank, found the tax law signed by President Donald Trump in December could persuade some families to choose renting over owning.
The study looked at the total cost of shelter, from rent payments and mortgages, to tax consequences, insurance and home repairs across the country.
The new tax law “will make buying a house more costly,” said report author Ed Golding, former head of the Federal Housing Administration and now a fellow at the institute. “Over time and on the margin, it’s going to affect people’s decisions.”
The new tax law increases some deductions, while limiting others. It cuts the mortgage interest deduction on new loans from $1 million to $750,000, and caps deductions for state and local taxes at $10,000, lower than what many Bay Area residents pay annually. Local home buyers are expected to feel the pinch; the average sale price for houses in the nine-county region was $825,000 in November.
Golding and co-author Laurie Goodman found that a three-person family with a household income of $150,000 would find much less tax savings in owning a typical home. The family would lose about $4,500 in interest deductions per year, or $380 per month.
An identical family with $300,000 annual income will see an even larger increase in costs for owning a home, with a smaller mortgage interest deduction. The household would lose roughly $10,500 in tax deductions, or $875 per month.
The assumptions are based on a home priced at four times household income, a 20 percent down payment, taxes, insurance, repairs and maintenance fees. The study also assumes appreciation of 3 percent of a home’s value.
Although the basic costs to housing will change under the new law, Golding said he expects a few people on the margin to choose renting over owning — but does not expect a large shift to renting in the short-term.
Local real estate agents say clients have been asking about the tax law, but concerns haven’t cooled the market.
At the same time, the population of renters in the San Jose metro area grew by 5 percent in the last decade, as home ownership rates in the region have dropped, according to a study by New York University researchers. The median price for a two-bedroom apartment in San Jose is $2,500 per month, among the highest in the nation.
“It’s too early to see any effect,” said William Doerlich, past president of the Bay East Association of Realtors. Buyers factor in many personal reasons for their decision beyond the effects of new tax laws, he said. Building up equity is a major consideration, he said.
Clients have asked about tax changes in recent month, he said. “It was a paramount issue, especially in the Bay Area,” he said.
Sandy Jamison, a real estate agent at Tuscana Properties in San Jose, said the decision for first-time buyers leaving the rental market is already difficult. As prices have climbed, many clients have decided to stay in an apartment, or leave the Bay Area.
Mortgage interest deductions are a consideration, she said. “It’s really hard to find a house under $750,000,” she said.
Golding said the long-term affects may be more apparent in high costs states like California. He also noted the complexity of the new tax law. “Not everybody’s a winner,” he said. “There’s some winners and losers.”