There has been a lot of talk about the effect of rising interest rates and the new tax law (specifically, limiting the property tax deduction to $10,000) on home prices in Montclair. Exclusive of any other market forces, the effect is a 10.7% reduction in value for a $700,000 home.
My methodology to assign specific values to the change in home values is as follows.
The median price of homes for sale in the past year in Montclair was approximately $700,000, so I started with that value and assumed an 80% mortgage.
I used 4.08% for the 30 Year Fixed rate at the end of Nov ’17, and 4.81% for the 30 year at the end of Nov ’18 and compared the monthly PITI (principle, interest, tax and insurance).
To gauge the property tax effect, I started with the appropriate tax (price @3.094% tax rate) net of a federal tax benefit at 30% tax bracket, then assigned that benefit to only the first $10,000.
The last column uses price as the variable to get back to a constant PITI from the first column; in essence, for the same spend, how much house could one afford given higher rates and lower tax deductibility.
Starting at $700k, one can afford a 10.7% lower price, $625,500. Does this mean your home is suddenly worth a whole lot less? That depends on what happens in the market and what price band your home is in.
There is a greater change of 12.8% at $1.2 million and a lesser change of 8.7% at $500k due to the effect of the property tax deductions.
One thing that’s certain is that buying power in the market has been reduced in a meaningful way.
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