Homeowners emerged relative winners from the recent tax reform fracas. Much still depends on the economy and individual circumstances--to say nothing of potential new tax legislation. Better Homes and Gardens magazine offers some insights to help you evaluate your situation and plans.
Homeownership costs will rise as tax reform takes hold, because lower tax brackets make homeowner deductions worth less.
In a 38% bracket in 1986, each dollar spent for mortgage interest and real estate taxes actually cost only 62 cents after tax deductions. Presuming the same income, the bracket becomes 28% in 1988 (35% in the transition year of 1987). That means each dollar spent for mortgage interest and taxes in 1988 will cost you 72 cents, not 62.
Depending on income brackets, the after-tax cash costs of homeownership will rise 5% to 15%, according to Kent Colton, executive director of the National Assn. of Home Builders in Washington.
A different sort of housing-cost hike could come at selling time. Unless you delay payment of capital gains taxes by buying a more expensive house, or the over-55 exemption eliminates your gain, less of the profit can be kept. The reason is that capital gains will be taxed as ordinary income starting in 1988. Uncle Sam will get up to 28 cents per dollar gained this year, up to 33 cents thereafter, depending on your new brackets. The old maximum was 20 cents.
Even though the homeowner deductions will be worth less, at least they still exist. "Homes are one of the few tax shelters left," said Jonathan Goldfarb, housing analyst for Merrill Lynch. That's bound to make them more desirable in the marketplace.
The value of the homeowner shelter is underscored by the fact that most consumer loan deductions will be phased out by 1991. As a result, first and second mortgages will be one of the few tax-deductible resources left for any kind of borrowing.
Whatever the appeal of tax deductions, however, most experts concur that local supply and demand--largely determined by the local economy--will continue to play the dominant role in determining housing values.
On balance, current homeowners come out on top. Renters and would-be home buyers will be the losers.
The reason: Tighter depreciation and other rules make it harder for landlords to get an adequate return on investment. As a result, rents for existing properties are bound to rise sooner or later. True, gluts in some apartment markets will keep rents there in check for a while. But overall, the tougher profit picture makes rental properties less attractive to investors, so fewer new properties will be built for now. One way or another, demand pressures will surge, and rents will go up--some say as much as 30%.
Low-income renters will be the worst off. "The poor will pay far more in higher rents than they'll save on taxes under this new bill," said H. James Brown, director of the Harvard-MIT Joint Center for Housing Studies.
Affordable housing for the poor is a tricky political and economic issue. But there is another good reason for concern about higher rents: Young people may have a harder time buying their first home, because paying more to a landlord leaves fewer dollars for building up a down payment.
That's on top of the fact that lenders already are demanding more cash up front for a home loan. Current homeowners can use equity for the cash when they trade up; first-timers don't have that luxury.
Why should homeowners even be concerned about first-time buyers? Quite simply, these buyers are essential to the entire housing chain. Without entry-level buyers, present owners cannot sell their homes and trade up.
The consensus is that you should buy now if you intend to do so before long. Housing prices have slackened somewhat, with pent-up demand satisfied to a degree when rates dropped last year. What's more, interest rates may have bottomed out. Goldfarb, for example, thinks mortgage rates will start rising toward the end of the year, as the economy picks up. Colton believes the deficit and other economic problems will push rates up before long.
One caution: Evaluate the local economy in terms of personal plans. There may be real bargains in a market where the economy is faltering, but values aren't likely to rise much until the economy turns around. Home buyers in such areas should plan to stay put for a while, and owners may want to delay trade-up plans because they'll get less for their present home.
Conversely, booming areas, like the Northeast, suggest a speedier rise in values--a quicker return on investment--but houses will cost more.