On Tuesday, the United States Senate and House of Representatives passed a bill that would restructure America’s tax code. But in the process of negotiating the details, the two houses ended up with a tax break for homebuyers that prices out most Bay Area properties.
Earlier this week, California Sen. Dianne Feinstein noted the most recent version of the tax bill (which will likely pass its final House vote today) includes a mortgage interest deduction for homes that cost $750,000 or less.
That’s a huge amount of money most places in America, but not in some of California’s largest metro areas.
“In California, seven counties have average home prices that are more than $750,000: Alameda, Marin, Orange, San Francisco, San Mateo, Santa Clara and Santa Cruz counties,” Feinstein said via Twitter.
Feinstein is right about the numbers. The final version of the mortgage interest deduction is a compromise figure: The House bill put in a cap of $500,000 and the Senate bill had $1 million (which is the present cap), so the two bodies ended up with $750K in the end.
And Feinstein is also right about the price of real estate in those seven California counties, according to the California Association of Realtors (CAR). In fact, CAR estimates the median price of a home in the Bay Area was over $900,000 in November.
Of 424 San Francisco properties presently listed on real estate site Redfin, only 61 are priced at $750K or less and six of those are just vacant land. Under the present, $1 million cap, the number of potentially eligible properties rises to 164.
[Update: Reader Aaron Master notes that Feinstein’s tweet appears to misinterpret how the deduction cap operates: “The way caps work is that you only get the first $750k of interest on your mortgage. For example, if you are so fortunate as to buy a $1M house you usually put 20 percent down leaving you with a $800000 mortgage. Under the new plan, interest on $750000 of the $800000 is deductible.
[...] “Therefore to figure out the max purchase price if you want to deduct all $750k worth of interest you take 750000/0.8 to get $937,500, which is higher than the 750k number.” Although notably still less than most houses in San Francisco.]
Some of the responses to Feinstein’s tweet noted that those buying $750,000 homes—more than twice the median home price in the US, according to the U.S. Census—in San Francisco or Marin may not really need the tax break.
As Beacon Economics co-founder Christopher Thornberg told the LA Times, “If you are borrowing a million bucks to get a home, the write-off is not your primary concern.”
But it is one more case where the spiraling price of buying in the Bay Area turns values and expectations upside down.
Docking the mortgage cap is supposed to be a hit at luxury real estate. However, as Jordan Weissman wrote for Slate, buyers “stuck house-hunting in San Francisco or New York” end up swept up by default. Because any new rule aimed at high-end luxury homes is going to hit most of San Francisco—even the teardowns.
- Tax Cuts Jobs Act [US Congress]
- County Sales Activity [CAR]
- San Francisco Homes [Redfin]
- US Home Prices [Census]
- California Homeownership More Expensive Under Bill [LA Times]
- Tax Bill Attacks Mortgage Deduction [Slate]