The Senate Passes the Tax Bill. Should be Law By Friday.
 
This blog includes Expert Analysis on How Homeowners Will be Affected, Startling Statistics on the Benefits of the American Dream, and 6 Tips to Successful Home Ownership.
 
The Tax Cut and Jobs Act Passed the House Tuesday, with the Senate voting yes in the wee hours of Wednesday morning. It was a partisan vote, passed narrowly with a simple majority (a few votes actually) by Republicans. The House will have to revote on Wednesday, due to two provisions that had to be changed. The Tax Cut and Jobs Act Bill is expected to be signed into law this week.
 
Just hours before the House passed the Tax Cut and Jobs Act today, Paul Ryan tweeted, “This is going to make such a positive difference in the lives of everyday working Americans from all walks of life." Bernie Sanders suggested that a better name for the bill is, “Trillions 4 Billionaires.” And homeowners everywhere, particularly in the NorthEast, waited for the final markup of the reconciliation of the House and Senate bills to see whether the American Dream of homeownership was on the chopping block.
 
How Will the Tax Bill Affect Real Estate & Homeowners?

Dr. Lawrence Yun, the chief economist of The National Association of Realtors was quite clear about the impact the bill will have on real estate. In my interview of December 13, 2017, Dr. Yun stated:
 
In terms of homeownership, the Tax Bill will be negative. Homeowners who feel an extra financial burden might wish to sell. Buyers will want to scale down. They will want a smaller home and a lower price, so they can stay within the mortgage interest deduction and property tax deduction limits. The upper end market will become much softer, while some of the residents living in high property tax states like New Jersey, New York, Connecticut and Illinois, may want to move elsewhere, where there is a lower property tax.
 
If you live in Silicon Valley, Silicon Beach, Seattle, New York City or Denver, the $750,000 mortgage interest deduction cap will trim back some of the mortgage interest that you can deduct on your taxes. For a large number of people living in expensive cities, this tax credit has been a lifeline keeping them afloat. If you live in the Northeast, the $10,000 cap on your property tax deduction could be the straw that breaks the family’s budget. New Jersey is already the state with the most foreclosures, and the changes to the treatment of property taxes are likely to make the situation even more dire (source: ATTOMDATA.com).
 
On the other hand, there are a few changes in the bill to be grateful for. Elizabeth Mendenhall, the president of The National Association of Realtors, issued a statement on December 15, 2017, writing, “We are particularly pleased with the treatment of capital gains on the sale of a home and the preservation of deductions for second homes. We are also grateful that the positive changes for commercial real estate and real estate professionals from the Senate bill have survived.” However, she too was concerned that “the overall structure of this bill poses problems for homeowners and the broader housing market.”
 
Homeownership is one of the most important ways that Americans build wealth. In the 2016 Survey of Consumer Finances, conducted by the Federal Reserve Board, one of the most startling statistics was the difference in median net worth between homeowners and renters. Median inflation-adjusted net worth—the difference between families’ gross assets and their liabilities—was $231,400 for homeowners in 2016 vs. $5,200 for renters.
 
So, how do you ensure that you build wealth, in today’s world, where single-family homes are higher priced than they’ve ever been and the new tax code is limiting the amount of the costs that you can write off? Here are a few tips.
 

 6 Tips for Achieving the $231,400 Homeowner Net Worth Or More (Vs. the $5,200 Renter Net Worth)

1. Consider Purchasing in a More Affordable Area. If you live in San Francisco and a starter home is priced at three quarters of a million dollars, then consider buying a more affordable weekend home on the outskirts of the expensive city. If you are 15 or 20 years out from retirement, perhaps there’s a more affordable, fixed-income friendly locale that you’d like to retire to. If you purchase there now, it could be paid off by the time you are no longer working, and on a tighter budget.
2. Shop in the Shadow Inventory. There are still 4.6 million U.S. homes that are underwater (source: ATTOMDATA.com), concentrated in Louisiana, Pennsylvania and Ohio. 1.4 million properties are vacant (bank-owned), concentrated in California, Florida and the Northeast (New Jersey, New York, Pennsylvania, Illinois, Ohio, etc.). New Jersey, Delaware, Maryland, Illinois and Nevada are the states with the highest foreclosure rates in the U.S. If you shop on the MLS, then you’re paying retail. When you shop in the shadow inventory, you can enjoy deep discounts, including a third or more off the competition.
3. Be Patient. If the Tax Bill is negative for homeownership, then there could be pressure on home prices to come down. It’s better to wait and buy lower, than buy high and watch the value of your home sink under the cost of your mortgage. Just ask anyone who purchased in 2006 and lived through the Great Recession.
4. Buy What You Can Afford. Sometimes the equation includes thinking bigger. Instead of a one-bedroom cottage, should you purchase a 4-bedroom home and rent out a few bedrooms? Or a family home with a guesthouse in the back for your parents? Sometimes the extra income can reduce your own housing costs dramatically, or even take care of the costs altogether.
5. Consider Taking a Job in an Upcoming Area. Tesla is building a gigawatt factory in Reno, Nevada, where median home prices are $306,000 vs. San Francisco, where homes average $839,000 (source: National Association of Realtors). Homes prices have rocketed up by 40% in the last 5 years, while incomes are only up 10% -- particularly in technology heavy cities, like San Francisco, Los Angeles, Seattle and Denver. If you can find a great job that’s off the beaten track a bit, your quality of life might be enhanced, along with your fiscal health.
6. Don’t Wait to Pay Off Student Loan Debt Before You Buy a Home. You’re going to live somewhere any way. So, why make the landlord rich? If you are earning a decent income, a lot of your housing load can still be tax deductible when you own your home, making your tax burden lighter. And, if you make a good purchase for a great price, then you have a real chance at increasing the value of your home. Home equity, combined with a huge tax write-off for the mortgage interest, plu making yourself rich instead of the landlord equals an outstanding win-win-win, as evidenced by the astonishing difference between the net worth of homeowners vs. renters.

 
The new tax bill limits the deductions that homeowners can take, but it doesn’t eliminate them. Some homeowners are going to be gravely impacted by the caps in mortgage interest rates and property taxes. However, for most Americans, the changes in the Tax Bill are important to note, but minor in actual impact. Consider the many advantages of home ownership, and keep your own American Dream alive, with the sound tips listed directly above.
 
As Lawrence Yun told me last week, “Home ownership is the American Dream. Let’s ensure that home ownership incentives remain in place.”
 
 
Listen to my complete interview with Dr. Lawrence Yun, the chief economist of The National Association of Realtors at BlogTalkRadio.com/NataliePace.

Other Blogs of Interest:
Government Shutdown Has Been Avoided. For Two Weeks.
 
Warren Buffett is on the Sidelines. GE Investors Lose Half.

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The Appropriations Bill that was passed last night by the Senate and the House, and signed by the President today, funds the U.S. government for two weeks, through December 22. All assumptions are that Congress will raise the debt limit again. That action should avert a credit downgrade for now. However, in a press release, Fitch Ratings notes that, while not raising the debt limit is the most significant short-term risk to the U.S. AAA Rating, “debt dynamics are also negative, which could put pressure on sovereign creditworthiness over the medium to long term.” (Translation: the astronomical U.S. debt could result in a credit downgrade soon, unless the debt limit shenanigans force a downgrade sooner.)
 
Headlines and the Administration are all pointing to stocks reaching all time highs, 4.1% unemployment and 3.3% GDP growth rate in the 3rd quarter as signs of a healthy economy. In fact, Fitch has raised GDP growth expectations for 2018 to 2.5%. However, touting those gains leaves out a lot of other relevant facts.

• 2.5% GDP growth is well below the 3.0% GDP growth projections that the Treasury Department is using to justify cutting taxes when the U.S. desperately needs the revenue to pay down debt.
• The Tax Bill that was passed by the House and Senate will add another trillion to the debt over the next decade.
• Public debt is already $20.5 trillion. Total debt and loans are an eye-popping $67 trillion.
  
• Consumer debt is higher than it has ever been.
• Housing prices are higher than they have ever been.
• Warren Buffett and Nobel Prize winning economist Robert Shiller both warn that the stock market is overvalued. (Warren also warns about bonds and Treasury Bills.)
• General Electric just laid off 12,000 employees, which amounts to 4% of its work force. GE used buybacks and dividends to prop up its stock for years. In 2017, GE slashed the dividend in half, and the share price has dropped by half. I warned that the “Higher the Dividend, the Higher the Risk,” in my 2012 book, The ABCs of Money. This continues to be very relevant today.

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• Low interest rates create bubbles. Today’s bubble is financial engineering. Corporations borrow cheap money to buy back their own stock and pay high dividends. This pushes up share prices and makes the stock look like a better bargain than it really is.
• This “Gig” economy has squeezed the Middle and Lower Classes, while increasing the wealth of the richest Americans. The unemployment numbers are misleading because many people have given up looking for a job, while others amass two or three different income sources to try and make ends meet.
• Meanwhile, cryptocurrency continues to roar to new highs, reflecting the sentiment of people who have lost faith in the banks.

 
Investor sentiment is positive. Everyone is happy with the Wall Street gains. However, this reminds me of the focus groups studies in 2002 that confirmed everyone liked mini vans and Hummers. Once gas prices jumped, all of the sudden everyone loved fuel efficiency. Once a Wall Street correction begins, and corrections happen in relatively predictable patterns, sentiment is likely return to where it was when the Occupy Wall Street movement began, in the wake of the Great Recession.
 
If you are trading on headlines, you’ll always be late to the party and one of the worst casualties of the crash. Vision and foresight are valuable commodities.
 
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Happy holy days.