Hot Wisconsin housing market likely to be cooled off by GOP Tax Scam

Many of you may have received your updated property assessments in the recent weeks. And if you’re like me, you may be seeing a sizable increase (ours was up by 8.75%). For example, the City of Milwaukee reported a 6.8% increase in overall assessed value vs 2017 this week, increasing the tax base in a city who has been handcuffed by a lack of growth in property values in recent years.

These higher assessments match up with what the Wisconsin Realtors Association said on Monday in their March Home Sales report. The WRA indicated prices were spiking up in many areas of the state to new highs.

The lack of homes for sale in March caused existing home sales to drop and prices to rise, despite a very strong state economy, according to the most recent analysis of the Wisconsin existing home market by the Wisconsin REALTORS® Association (WRA). With year-over-year inventories down 17.1 percent, sales slipped 2.3 percent in March 2018 compared to March 2017, while prices rose 7 percent to $174,900 over that same period. On a year-to-date basis, sales were up 2.1 percent, and median prices rose 6.3 percent relative to the first three months of 2017…

"Strong demand and tight supply have pushed our prices up at nearly three times the rate of inflation over the last year," said WRA President & CEO Michael Theo. Headline inflation derived from the Consumer Price Index has been at 2 percent or higher since September of last year, and it reached 2.4 percent in March. In contrast, median prices rose 7 percent between March 2017 and March 2018. The tight labor market is pushing income levels up, but overall, affordability has slipped as both home prices and mortgage rates continue to rise. The 30-year fixed-rate mortgage averaged 3.99 percent in 2017, and it has increased nearly a half point to 4.44 percent in March. The Wisconsin Housing Affordability Index represents the fraction of the median-priced home that a household with median family income can afford to buy, assuming a 20 percent down payment and the remaining 80 percent financed with a 30-year fixed mortgage. The index was at 201 in March 2018, but it stood at 219 in March 2017 and was 235 just two years ago. The good news is that Wisconsin's affordability remains well above the national rate, which was at 159.2 in February. "Still, declining affordability is likely to be the norm this year as rising mortgage rates and rising prices are likely to continue throughout 2018," said Theo.

These signs don't stay up for long these days.

While Theo talks up the price increases, he also hints at the problems that are looming in Wisconsin’s housing sector, and the economy as a whole. If wage increases don’t keep up with annual price increases of 6-7%, home ownership will become out of reach for more individuals, and sales and prices will drop. The other possibility is that housing takes up so much of an individual’s expenses that other sectors in the consumer economy will suffer.

Another issue that Theo mentions is rising interest rates, which were in the news today as the benchmark 10-year Treasury note hit 3% for the first time in 4 years. That’s quite a change from 10-year rates that were barely above 2.0% in September 2017 and ended last year at 2.40%.

The reasons for the higher rates are two-fold. One involves a logical tightening from the Federal Reserve which raises rates when the economy is growing, near full employment, and has inflation going up. But the other deals with the increased debt that is a result of the Piece of Shit tax bill from GOP lawmakers in DC.

The yield rose as high as 2.95 percent in February, before retreating into a range for the past two months. But the prospect of a deluge of new government debt has weighed on the $14.9 trillion Treasuries market. It climbed as high as 3.0014 percent on Tuesday.

The U.S. budget deficit will surpass $1 trillion by 2020, two years sooner than previously estimated, the Congressional Budget Office said this month. At the same time, the Fed is trimming its balance sheet, meaning the amount of net new debt is poised to surge in the years ahead. Treasury has asked primary dealers to give forecasts for America’s borrowing needs over the coming three fiscal years, ahead of the next quarterly refunding on May 2.

Yields were already heading higher at the start of 2018 amid Fed rate hikes, and policy makers have shown no signs of slowing their tightening even with U.S. stock markets fluctuating in recent months.

Those higher rates are one potential headwind that can slow down the housing market, since it will cost individuals more to borrow money to buy a house. Another complication might be if the higher rates and inflation scare Wall Streeters into panic and tanks the stock market, like we saw today with a drop of 424 points in the DOW.

But one item Theo and the right-wing Realtors don’t mention as a looming problem from the housing sector is due to that garbage tax bill given to us by Paul Ryan and other GOPs in DC – where the tax advantages to home ownership are going away for many Americans, and Wisconsinites in particular. That was reiterated in a report to Congress yesterday.

About 13.8 million taxpayers will be able to claim the mortgage-interest deduction in 2018, down from more 32.3 million in 2017, estimates from the Joint Committee on Taxation show. That's about a 57 percent drop.

Already, the deduction was not used by most taxpayers. Of the 150 million or so tax returns the IRS has received annually in recent years, just 20 percent claimed the deduction, according to research from the Urban Brookings Tax Policy Center.

The anticipated drop is largely due to the near-doubling of the standard deduction that took effect Jan. 1 under the new tax law. Fewer taxpayers are expected to itemize their deductions, which is the only way to take advantage of the tax break for interest paid on mortgages.

The new report estimates that 18 million households will itemize deductions this year, down from 46.5 million last year.

Even more alarming is that the bulk of individuals who lose the deductions are in the middle-income levels, with the JCT saying that the number of people that have between $30,000 and $100,000 in income that take the mortgage deduction will drop from over 10 million in the taxes they just filed to less than 3.6 million next year. That’s the price level of people who are on the borderline between buying and renting already, and not being able to write off that mortgage interest would be a significant “CON” when the rent-vs-buy decision is made.

The Wisconsin home market may be hit particularly hard, as we are likely to have a disproportionate amount of people who will stop itemizing itemize next year. This isn’t just due to fewer people writing off their mortgage interest, but also because the State and Local Tax (SALT) exemption won’t be helping much either. SALT was limited to a total of $10,000 in the Piece of Shit tax bill, even for married couples filing jointly, which makes the deduction less cost-efficient for many individuals.

Wisconsinites in particular rely on the SALT deduction, since the state’s tax code is dependent on income taxes for more than 50% of its General Fund revenue, and property taxes are the main method of raising revenue at the local level. Not being able to write off property taxes would be yet another deterrent to buying a house in Wisconsin, and as that reality hits people over the next year, will that translate into lower housing demand as well?

When you combine the concerns of higher home prices, higher interest rates and fewer tax benefits, it sure seems like there is less reason to buy a home in Wisconsin, all things otherwise being equal. Which means that if the economy goes bad in this state, or something else happens to make people stop buying, the currently-hot Wisconsin housing market could cool off and start spiraling into “tank mode” quickly. So if you got an 8.75% increase in your assessment like I did, I wouldn't count on price hikes like that for much longer.