West Coast Real Estate Starts to Turn

When I moved to the West coast I noted that prices were generally high relative to incomes.  It is well documented elsewhere that San Francisco area housing prices are very high and Seattle has been skyrocketing as well.  In Portland, housing isn’t as costly as Seattle or San Francisco but is very high relative to the local job market, particularly within the city limits and in the nicer areas.  A condo in “the Pearl” in Portland (a local high rise market) is 2-3 times what I’d pay for a comparable unit in my former River North area in Chicago.

From an economic perspective, the income tax changes passed in late 2017, particularly the virtual elimination of the State and Local Tax deduction (SALT) for high earner households, along with continuing reductions in the mortgage interest deduction, should have had an immediate, negative impact on house prices in high tax states such as Oregon and California.  I didn’t see these effects, but changes in the housing market take a long time to appear, because many transactions are already under way and sellers will hang on in the market rather than taking a perceived “hit” to the value that they expect to receive.

It looks like the market, in Portland at least, has crested and is (likely) to proceed in a downward direction.  From an article in Bloomberg titled “The US Housing Market Looks Headed for Its Worst Slowdown in Years

Dustin Miller, an agent with Windermere Realty Trust in Portland, said he’s trying to manage sellers’ expectations, something he hasn’t had to do since the end of the last housing boom. One customer, a baby boomer moving to a new home across the state, expected to have buyers fighting over her house. She got one bid, below her asking price.  “Buyers want to shop and take some time, as opposed to having to rush and throw offers in,” Miller said. “It’s the market correcting itself. At some point, you hit a peak of momentum, and then things level off.”

The real estate agent refers to this as moving from a ‘peak’ to ‘leveling off’ and we will see if this moves to a prolonged rout, like we had back in 2008-9.  It will also be interesting to see if real estate in high tax states doesn’t bounce back as fast as real estate in states with lower tax rates, but we won’t be able to see the net effect of this for many years (and it is but one variable among a sea of variables).

I have a semi-sad theory about this – I don’t think folks understand the impact of the changes in tax laws until they file their taxes.  Whether due to complexity (it is hard to model just a couple of variables in a tax program unless you know what you are doing) or a lack of financial acumen, I believe that after 2018 taxes are filed in the middle of 2019 you will start to see more of a “wealth effect” as home owners start to realize the potentially large impact of the changes to the SALT deduction.

As I look out my window in Portland I hope that they complete the high rise buildings that they are working on, and don’t break ground on new ones.  We used to look at partially completed buildings for many years in Chicago after the 2008-9 crisis, until they finally completed them up to 5 years later.

Cross posted at LITGM

21 thoughts on “West Coast Real Estate Starts to Turn”

  1. Phoenix and Las Vegas were full of immobile cranes for years after 2008.

    One reason we moved to Arizona is that the RE market felt toppy to me. We looked at a house two blocks from my son’s and the sellers were asking $707K. It was nice with a pool but not as large as our house in Tucson. They sold it the first weekend it was listed.

    My son will do fine as they bought about twelve years ago. They would sell for twice what they paid.

    I sold my house in 2010 for three times what I paid and my wife and I just got back together three years ago after 25 years.

    We are flying to Portland tomorrow for the wedding of her youngest grandson. Her son, his father, has been building custom homes in the:”wine country” of Oregon.

  2. West coast real estate is a complex topic. As long as supply is artificially constrained, as it is by the environmental wingnuts in charge of west coast politics, and tech creates a sufficient crop of extraordinarily wealthy individuals, prices will not fall dramatically. As one realtor in Palo Alto told me, prices never fall. Days on market may stretch but prices don’t fall. She’s been right for as long as I can remember.

    A good site to follow the macro market is newgeography. It also has lots of interesting social analysis of the impact of these policies, such as today’s article The Hollowing-Out of the California Dream. That details why we left the Grody State. The future for Caliphornia is bleak. And with Zinke joining in the efforts to drain Hetch Hetchy things can only get worse. I’d love to restore HH, but with the focus of Caliphornia infrastructure being the bullet train to nowhere, it is unlikely that a great water supply would be adequately replaced.

  3. I honestly don’t care if those who have bought into the West Coast housing market take a financial bath. The question is whether there are any financial institutions still vulnerable to real estate values. And whether DC fully grasps what will happen to them if they bail them out, again.

  4. WalletHub shows the overall tax burden by state. The top ten combined income and property tax states:

    New York: 9.4%
    New Jersey: 7.6
    Vermont: 7.5
    Connecticut: 7.5
    Maine: 7.5
    Oregon: 7.3
    Rhode Island: 7.0
    Massachusetts: 7.0
    Minnesota: 6.7
    Maryland: 6.7

    All except for two are no more than one state away from Canada. Why is it that high latitude states and countries have an affinity for higher taxes? Demographics, or historical demographics?

  5. Political Calculations measures home prices with his various econometrics and has been tracking a decline led by California. Yesterday he showed that the ratio of new home prices to household income has been dropping:


    That could be the good news of the bad news story. Rising rates are pummeling real estate, but if the tax cuts spur wage growth it might keep potential buyers in the hunt to snatch up more affordable homes. The precarious balancing act of monetary tightening combined with fiscal stimulus could mean that elusive unicorn we used to hear about – the soft landing – may be within our grasp. Blue states being the big wildcard, as has been mentioned.

  6. It will happen again but it will be different. The SALT effect could go either way depending on location as people sell in high-tax states and relocate as Mike K did. There is probably less leverage and bad debt holding up prices as compared to 2008.

    In South FL there seem to be construction cranes everywhere as was the case before the last crash. High-end condos are a glut. Meanwhile there is relatively little low-end construction. People with modest incomes can’t get mortgages. Rents on older low-end apartments are historically high. There is again home construction in outlying areas. However, municipal authorities seem clueless and/or paralyzed by ideological planning fantasies and do little to improve the roads. Increased road congestion probably helps drive up rents and property prices in lower-income neighborhoods near the downtown. Home prices in nice neighborhoods are at moonish levels. People continue to come to FL from elsewhere.

    The boom may be in its last stages or it might continue for as long as FL keeps gaining population. The bust might be triggered by a national housing bust, an economic recession, a runup in interest rates, a major hurricane, a shift to Democratic control of the state govt, or some other unexpected event. Who knows when but it’s obviously closer than it was a couple of years ago.

  7. CR,

    Historical. Those states used property tax originally and rely on it more heavily. Sales tax came later. Half of them, Oregon, Mass, NJ, Conn, Md rank in the bottom 10 for sales tax.

  8. In terms of rising housing prices, Atlanta may be the new Seattle or San Francisco. I’ve predicted that Atlanta may become “Manhattan of the South:” a place where only the rich and subsidized can afford to live in–minus the cultural literacy.

  9. Bingo!, on delayed reaction to the tax changes. I think you are spot-on with mid 2019 and afterwards before SALT hits the affluent in the blue , sexy, tax-lovey areas. Maybe even into 2020. This should have a effect on ” summer homes ” and whatnot, no? Isn’t that part of the affluent’s toolbox… to have houses here and there and a condo or two, and they get to write off the taxes?

  10. The whole DC metro area is filled with construction.

    Trump really needs to get on with moving some Federal agencies, or big parts thereof, to other parts of the country.

  11. The Antiplanner–Randal O’Toole–had a post last month comparing metro areas with lots of growth restrictions like Portland, San Francisco, and Seattle to metros with fewer restrictions like Atlanta, Omaha, and Raleigh. Inflation-adjusted housing prices in the former have gone up much more than in the latter.

  12. Another factor that is rarely discusses is the Prop 13 effect.

    Prop 13 is usually attacked by the left as another bonus for the rich. In fact, it keeps housing costs down by keeping the property tax at about 1% which allows those who have owned their homes to stay in a reasonable tax situation.

  13. Only partly correct in that last sentence, Mike. That 1% refers to price when Prop 13 went into effect or move in price, whichever came later. Meanwhile, those who remain in homes they have long owned usually have watched part of the reason for the choice of that home change. The kids grow up and move out. Perhaps, even, a spouse dies. But the parent(s) remaining likely now has a home much larger than needed, perhaps even bigger than can be self-maintained. Selling the larger home would certainly pay for the smaller. Not so the tax burden. The new place has its tax set based on the move in price. One can end up paying a much higher tax on a small apartment than they had been paying on a large house. So people try to hang on to the bigger place.

    Ironical end result: younger families don’t get access to starter homes as older folks move out. Instead, they will have to ante up for a newly built large house. Meanwhile, lots of house space goes underutilized.

  14. Oh, I agree about the freezing aspect of the prop 13but it still factors into the cost of a house.

    The tax rate may be 1 1/4 % but it is still a big subsidy of home ownership.

    Ann Althouse pays $12,000 on a house that is probably worth $300k.

  15. We drove out of Portland yesterday on the road to McMinnville, where we are staying. The traffic was awful. Three hours to go about 40 miles.

    The river is an issue, as it is in Seattle with the Lake Union, but once out of the city it was worse.

    It was Friday and the weather is good so much of it may have been heading to the coast for the weekend,

  16. CA is a total $hith0le, and the reason is that it is governed by propositions and judges. Prop 13 was directly caused by judges destroying how property taxes funded schools, and of course one-person-one-vote has put the state beyond saving.

  17. Prop 13 was directly caused by judges destroying how property taxes funded schools,

    In the old days, property taxes funded local government and x]schools but Jerry Brown, in an earlier phase of his misgovernment, redirected property taxes away from local government and they then switched to sales tax as a revenue source.

    This resulted in cities recruiting businesses like auto sales and shopping malls which generate sales tax. They used subsidies to lure such businesses and this resulted in bad planning with subsidies preceding any revenue. Some such subsidized businesses failed, leaving the city with bonds to repay with no revenue stream to do so.

  18. Moonbeam was just trying to deal with the Serrano v. Priest fallout. (btw, it is absurd and outrageous that he was given a grandfathered exemption to the governor term limits, when the text of the referendum suggested absolutely no such thing.) As bad as he is, though, it must be said that CA is about to be in for a real world of hurt, since the next generation of their political leaders are absolutely off the charts crazy.

  19. The new place has its tax set based on the move in price.

    True also for the senior exemption in Cook County. My parents were paying $1500/year P-taxes on a 3BR, two story house; their taxes were frozen at that level 25 years ago when one turned 65. I couldn’t get them to move into a smaller house on one level because they’d take a $4000/year hit when their P-taxes ramped back up.

    Golden handcuffs.

  20. I haven’t done any kind of exhaustive analysis, but it appears to me that the SALT-deduction limitation is not nearly as big a deal as either side is making it out to be.

    The reason for this is that these large deductions subject you to the alternative minimum tax under the existing tax code. (Don’t ask me how I know this… Ouch!)

    It would be great if someone who has more time than I do would take a look at this.

Comments are closed.