Maybe it is too soon to have a reaction since the fine details haven't been completely determined---and it is going to proceed to conference committee to hash out the differences between House and Senate versions.
An historian of the depression (Robert McElvaine) posted an article on the Washington Post website that warned this bill was like driving an already stimulated economy over a cliff (eventually---and assuming the Fed doesn't hit the brakes at some point).
I'm not really familiar with McElvaine's work----someone I know said he was kind of "partisan". Not really sure.
I'm sure there are important differences----we have nothing similar to the Smoot Hawley tariff yet----although Trump has been repeatedly threatening a trade war. Too bad Bernanke left the Fed---he is also considered an expert on the Great Depression.
What is your take on this?
BTW, Bruce Norris is seeing the wisdom of investing in Florida real estate---he is going to do a timing report there.
On the plus side, by adding a trillion dollars to companies that are already very deep in cash it might serve to prolong the stock market and real estate markets that are already very high, not to mention inflate other assets as well.
In fact, I hear that alot of companies when given this tax windfall may use it to increase their dividends or do a stock buyback---neither of which are necessarily going to improve the job market as has been claimed. The stock market will probably rise in response to the passage of the bill, even though the market is very high. But it just may mean that when the crash comes (either real estate or stock) it's going to be a lollapalooza. (Is that even a word?)
Myself, I don't claim to know---I don't think Bruce Norris most recent report could possibly have accounted for this type of situation. The California real estate market doesn't make alot of sense right now but the question remains where one should invest.
The Senate version of the tax bill repeals the mortgage interest deduction, the House version doesn't, so it will be interesting to see if that will go away. I saw someone claim that repealing it would reduce the value of many houses by 10%, though I'm not sure what that prediction is based upon. But I would think those at the high end of the market will be most severely affected. Is it really so desireable to own a mansion if you can't deduct the interest?
Individually each of these new changes may seem tolerable----but collectively they might also constitute a real tipping point in many instances.
But my interpretation is that both versions will eliminate the deductibility of state and local taxes----though I think 1 senator obtained a concession that a certain amount of property tax will be deductible, so I'm not sure how that will end up it.
Is eliminating the deductibility of state and local interest going to bankrupt high tax states like California? (The house limits the deduction to 10 grand in property taxes, whereas the Senate makes it go away entirely.) I don't know the answer, but it doesn't sound like a positive development for those who live in such states. If you are nearing retirement looking at some of those states without high taxes might suddenly seem like a good idea. Part of the problem is figuring out how states like California will react under the new regime---and the extent to which they will need to change their policies.
I don't know how that's likely to work.
According to a NY Times article, the elimination of state and local taxes will constitute a tax hike but mainly for those earning above $100,000 a year (who will bear 90% of the tax hike).
For a small real estate investor, the tax bill doesn't really offer much. If there is substantial depreciation (which is almost always true), that investor isn't paying taxes anyway. The huge tax cut on large businesses isn't going to impact most small real estate investors.
The bill also permits repatriation of foreign funds at a very low rate---but since when are most ordinary investors going to have their funds in Ireland or other tax havens?
The bill's theory is that these funds will be used to expend the businesses and create jobs---but if that is the outcome they wanted they could simply have required it. In any case, the unemployment rate isn't that high---and this kind of stimulus would have made far more sense in 2008 than 2017.
Given that the tax rates are going down, however, it strikes at one of the reasons why most investors resort to real estate---so they won't have to pay substantial taxes. So why buy real estate in this new tax environment? I thnk you would have to seriously rethink it. The other reason that investors flock to real estate is as an inflation hedge. Is that still valid?
I'm not sure how to answer these questions. I wonder if Bruce needs to rewrite his latest timing report because the game HAS changed. Recall how real estate investors got totally hosed in 1986----frequently dramatic tax changes don't work to our benefit.
Whenever dramatic changes take place---especially to the tax environment---I think you need to go back to square one and ask: Does real estate make any sense in this environment? Is it the best way to invest funds?
I wonder what Bruce Norris will say in his presentation this month---maybe he needs to rewrite his latest timing report. (I know he mentioned these kind of legislative changes as a factor---but it's very different as a fait accomplit.)
Maybe this is the exit signal from the market that we have all been waiting for---time to head for the hills---I don't claim to know but it seems kind of scary. Even if real estate makes sense---does California real estate make sense in this new environment? (I realize that alot of investors have already exited.)
Investors doing high end flips were already in a fairly risky environment----is now the time to go on hiatus?
One of my problems with the new tax bill is the timing---the 1986 act took 2 years to enact---this one had 2 months of closed door hearings----and now they are going to seek to put it into law so quickly there wasn't even enough time in some instances to fully type it out---Ouch. Bruce Norris has a concept he calls a "market maker"---and surely a tax change this dramatic would qualify. The 1986 act is instructive for another reason----it changed the rules almost 180 degrees---professionals would use tax shelters to shelter income whether or not the investment made money or not. After 1986, that kind of market crashed and burned. For alot of real estate investors 1986 was a catastrophe.
I think that California real estate is just plain worth less under the new regime in view of:
1) The state and local tax deduction elimination. (The 10K property tax deduction may survive, but it wasn’t in both versions)
2) The mortgage interest elimation
3) The low wages and income disparity.
4) The fact that rents have never been higher, historically speaking, and cannot possibly increase
5) The fact that health insurance will be eliminated.
6) The fact that other benefits are also going to be targeted.
7) the fact that interest rates can only go up, not down.
8) The fact that we are overdue for a recession / downturn since the business cycle is much longer than usual.
9) The fact that we were already facing austerity at some point given the deficit and now we will be forced to address this at a time when the government is receiving much less income. Do you have Section 8 tenants? Ward Hannigan, one of the smartest landlords specialized in such tenants. Good luck with that surviving the new round of budget cuts (required because the government is receiving so much less income).
10) The fact that Bruce Norris landed in a no income tax state that arguably isn’t going to face the same budget challenges makes him look, by 20/20 hindsight, like a genius. (OK, that was probably just lucky since he did it in 2015---and deals like he found are in VERY short supply).
11) Given the dramatic shrinkage of the government, we will probably be destined to have low growth or no growth for a very long time.
12) The real estate market was already flat anyway. No sense in sticking around at this point. I wonder if Bruce Norris will say something similar in his presentation at sdcia?
13) A landlord has to have something to sell that is affordable. By any measure, going forward is going to be a much more challenging environment and how are tenants going to pay their rent (at historic highs) in this new environment?
14) The lending world is going to need to cut back on front end and back end ratios since buying real estate has also become much less affordable, especially in California. Also, migration to California has been decreasing---not really affordable here.
15) The Republican tax increase might find themselves in opposition to the Fed since one of their underlying aims is to avoid inflation and the tax increase is very inflationary. It would have been smarter for them to have delayed the tax increase, perhaps triggered by the state of the economy.
The end of the year is usually a good time to consult with a tax advisor---it seems like there will be alot to talk about this year.
Curtain going down on California real estate? At a minimum, I think one should consider leaving the market. Though since almost every other asset class is grossly overvalued I'm not sure what options are attractive at this point.
Will the last investor who exits the market kindly turn the light off?
Anyone else have a thought on this?