As we begin a new decade, one that most certainly will bring many changes, let’s take a moment to review some of the highlights of 2019. Here’s a list of stories that are especially significant for real estate investors.
Reviewing these important stories will help us focus on where we are coming from, and give us a better understanding of what comes next. So let’s take a look at 2019.
New Tax Laws a Win for Investors
We began the year with a whole new set of tax laws that were great for real estate investors, but not so great for many homeowners. New provisions gave pass-through entities like LLCs a big tax discount. As you know, many real estate investors hold their properties as LLCs so this was a big win for many people. We were all greatly relieved to hear that the 1031 Exchange and a capital gains exclusion for the sale of a primary residence both survived the tax reform battle. That last one is a win for homeowners, but the new $10,000 limit on state and local tax or SALT deductions has been a thorn in the side of homeowners in high-tax states. Lower limits on the mortgage interest deduction also cut into the benefits of homeownership. Lower income tax brackets, and a higher standard deduction have helped offset some of the take-aways.
Amazon Pulls the Plug on New York
New York was one of two big winners of the Amazon HQ2 contest but quickly became a huge loser on Valentine’s Day. That’s when Amazon “broke up” with New York and pulled out of a deal to locate a second headquarters on Long Island. It happened because of a backlash by housing advocates who were worried that Amazon’s presence or the so-called “Amazon effect” would drive up home prices and drive out low income residents. They also objected to the tax breaks the city promised Amazon. But along with Amazon’s departure went some 25,000 to 40,000 jobs that could have gone to at least some of those residents, not to mention the opportunity for the local economy and business owners to thrive.
The “Amazon Effect” Proves True
On the other side of the HQ2 contest was Arlington, Virginia, which would share the mantle with New York as the host of Amazon’s second headquarters. But while New York bowed out, Arlington welcomed Amazon with open arms… and that has fired up the real estate market in that area. A year after Amazon announced the winners, Realtor.com did a study that shows the median home price in the Arlington area was up 33% to $863.000, active listings were down about 50%, and homes were selling in less than 28 days. New York had initially experienced a 50% surge in home sales, but after the “break up,” sales activity died down, and home prices started slipping. The study shows that sales and home prices were down about 15%. But not all is lost for New York. Amazon has more recently signed a lease that will bring 1,500 jobs to the city, and it already has some 3,500 employees working there. But that’s far fewer than 25 to 40,000.
U.S. Rents Defy Gravity
Landlords have been enjoying a slow but steady rise in rents, especially at the low end. CoreLogic keeps track of single-family rents and has consistently reported rent increases and where they’ve risen the most. Phoenix and Las Vegas have been the biggest winners in that regard, but the average year-over-year increase from one month to the next has typically been around 3% for the year. Of course, investors are paying more for the homes they are offering for rent, but that’s not something that housing advocates pay much attention to, which brings us to our next big story.
Statewide Rent Control in Oregon
The state of Oregon became the first in the nation to adopt statewide rent control, to the chagrin of landlords everywhere because it sets a precedent. The new law caps rent increases at 7% plus inflation. It also bans no-cause evictions and applies to both apartments and single-family homes. Landlords that break the rules, face penalties. California also followed suit and approved similar statewide rent caps. It also limited rent increases to 7% plus the cost of living with a 10% max.
Lawmakers in both states say rent control will help tenants who are unable to pay higher rents, but housing experts says it doesn’t get to the root of the problem. They say we need more rentals to meet the demand and keep rents from rising, but that rent control will do the opposite and, a study by the National Apartment Association appears to prove that claim. The association did a first-of-its-kind study by projecting the effects of a 7% rent cap on four metropolitan areas. The results show a lower ROI for landlords and developers, lower margins for maintenance on existing units and the building of new units, less profitability, lower property values, and an overall disincentive for investors to do business in markets with rent control.
We will continue with our review in Part 2 of “Best Real Estate Stories of 2019.”