Sunday, March 01, 2009

The Armchair Economist #1: Noe Valley Home Price Prediction

With the upcoming federal and state tax hikes, I’ve done a little math and have concluded that Noe Valley home prices—or any area of the Bay where homes are still priced in the “around a million” range—should drop faster than the rest of the area over the next 24* months. 

The current median asking price in Noe Valley is $1.2m.  Assuming 20% down payment, this requires the home buyer be in the top two tax brackets that the Obama administration is targeting for a tax hike (minimum $208K per year, married filing jointly – but $171K if you were single). 

This alone means less money for mortgage payments.  However,  additionally, the mortgage interest deduction for people in these tax brackets will be limited to 28%.  This is actually to be applied against all itemized deductions for taxpayers in a bracket above 28%, and was called the “hidden $179b revenue raiser” by Forbes

So let’s assume a $1.3m house with a $300K downpayment, earnings of $300K per year in the couple.  This would seem reasonable for the stats of a homebuyer in Noe Valley.   Currently that homebuyer can deduct $28K in mortgage interest in the first year.  This year, under the Obama proposal, they’ll be hit for $4200 of that.  Overall their take home earnings will be reduced by  $9000 from the higher tax bracket.   California is going to take an extra $750, not including the higher state-wide sales and vehicle fees.  Let’s just round the whole number up to $15000 to account for the higher additional CA taxes (vehicle, sales).

The mortgage payment for this house would be $7700.  The affordability for homebuyer should drop by $1250 a month with the new tax laws – meaning a 16% drop.

If we estimate home prices regionally to drop an additional 10%, my approximation is that the median home price in Noe Valley will end up being no higher than $907200 under the new tax plans of California and the Federal government.

 

* - I think this math is pretty reasonable for the number I came up with, but the timeframe is always hard to call.  I put 24 months because I believe 2010 will have additional foreclosures due to prime ARM and option-a mortgages being reset, or people walking away from their homes due to the extreme price drops nationwide.

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