The recently enacted Tax Cuts and Jobs Act has stirred a tremendous amount of interest lately, specifically regarding the impact on the cost of homeownership and potential impact on future home purchasing and selling decisions.
A new limitation on state and local tax deductions leaves many homeowners facing an increase in the after-tax cost of homeownership, and a decrease in the amount of deductible mortgage interest on new home-purchase mortgages may have others rethinking a decision to buy a home, particularly in cases where a homeowner desires to trade up. While it’s too early to gauge the full impact of the tax reform, by analyzing both property tax levies and recent mortgage originations around the country we can identify and highlight the highest-cost areas which are likely to be affected the most. Once identified, we will be able to compare the market activity in those areas with activity in non-high-cost areas to search for indicators of influence on housing market behavior.
Using CoreLogic data sourced from public records to determine the high-cost areas, we first estimate the annual mortgage interest payment for each county assuming a 4-percent interest rate on the average home loan origination amount for 2017. Next, we identify the median annual property tax amount for each county. The mortgage interest and property tax amounts for each county are then summed, allowing us to rank the counties by the total cost. Using this methodology, we identified the top-100 highest-cost counties and noted their location around the U.S. The maps illustrate the location of the highest-cost counties; Figure 1 shows the count of counties by state in the top-100 and Figure 2 lists the top-50 highest cost counties ordered by rank.
An initial study of the top-100 ranked high-cost counties unsurprisingly shows a high concentration in California. In all, there were 22 counties from California that made the top 100, all situated on or near the coast, and 16 of those counties made the top 50. Four counties in California, all in the San Francisco Bay Area (San Mateo, San Francisco, Marin and Santa Clara), had an average 2017 loan origination amount over the new maximum of $750,000 and a median property tax amount exceeding $6,000.
Adding to the high-cost share for the west coast, Hawaii, Oregon and Washington each have three counties that fall in the list of top-100 highest-cost counties. Together with Alaska, the Pacific States region makes up nearly one-third of the list.
On the opposite side of the country, New York and New Jersey combine to represent 23 of the top-100 counties and 28 percent of the top-50. The $924,000 average loan amount in New York, N.Y. in 2017 well exceeds the new origination limit for mortgage interest tax.
Other states along the Eastern Seaboard also have several counties that fall within the top-100 highest cost areas. Notably, Massachusetts (Vineyard Haven, Cambridge-Newton-Framingham, Boston areas) and Virginia (Washington-Arlington-Alexandria, DC-VA-MD-WV) contribute a total of 13 counties, seven and six respectively. Half of the top-50 list is comprised of counties existing in states along the east coast.
Property tax amounts in Texas are the primary factor behind five of its counties showing on the list. Although none ranked inside the top-50 when considering both mortgage interest expense and property tax, four of the counties – Collin and Denton (Dallas-Plano-Irving CBSA), Travis (Austin-Round Rock CBSA), and Fort Bend (Houston area) – have median property taxes exceeding $5,000. Ranking only by property tax amounts, each of those four counties would be in the top half of the high-cost areas.
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