The new tax-cut law has plenty of goodies in it for homeowners, buyers and real estate investors -- but don't look to it for overnight miracles on mortgage rates or a housing turnaround.
The law makes owning a home and other property more attractive than ever in tax terms. It also holds out the promise of financial relief for the vast bulk of America's home-mortgage lenders and the savings depositors who provide them their cash.
But the new tax law shouldn't be overrated regarding its direct, immediate impact on real estate. Its beneficiaries are carefully defined in the conference reports passed by the House and Senate. If you fit into one of the favored categories, the law could be excellent news and help you in real estate this year.
If you're not one of the favored, the law's impact won't be much at all, at least in the short run.
Take the so-called "all-savers" certificate the law creates. By Oct. 1, thrift institutions and banks will be blitzing you with TV, radio and print advertisements seeking your deposits in the new tax-exempt, one-year certificate accounts.
Up to $1,000 in interest will be available to you tax-free as an individual taxpayer, $2,000 as joint taxpayers. The certificates will carry interest rates pegged to Treasury bill rates, and would yield about 11 percent in today's market.
The actual yield to you will depend upon your own tax bracket; the higher your marginal bracket, the higher your true return will be from the certificates. Taxpayers in the 40 to 50 percent bracket, for instance, might end up with after-tax yields in the 18 to 20 percent range. Taxpayers in the 30 percent bracket and below shouldn't even bother with the certificates; they should stay in the money-market funds.
In short, if you've got the cash, the right tax bracket and can afford to lock up money for a year at a time -- you're one of the favored under the new tax law. If you don't, you're not.
Another favored category: prospective home buyers. Since 75 percent of the proceeds of the savings certificates are supposed to end up in the home mortgage (or agricultural loan) market, more mortgage money will be available this fall than probably would have been without the new tax law.
But don't count on mortgage rates to be dramatically below what they otherwise would have been. Quotes from S&Ls and banks on new mortgages could drop a percentage point or so, thanks to the new infusions. They're not likely to go to 12 or 13 percent, however, unless the overall money market cools off.
S&Ls nationwide have lost $11 billion in deposits in the past six months alone. The majority of them are running in the red or close to it. They're not going to slash rates by three and four percentage points simply because the interest cost of a small portion of their portfolios has dropped.
What they are likely to do, however -- and this will be the key impact of the certificates on individual home buyers and sellers -- will be to greatly increase home-resale financial activity.
Most new lending by S&Ls this summer, according to economist Thomas Parliment of the U.S. League of Savings Associations, has been on so-called "blend"-rate loans.
These are new, discount-rate mortgages written on homes financed previously by a lender with single-digit interest-rate loans. The buyer of a house with an 81/2 percent, nonassumable mortgage with 25 years still to run, for instance, can often qualify for a new 13 to 14 percent loan by negotiating with the S&L or bank that originally financed it.
The lender wants to get the red ink-producing loan off its books and is usually willing to slash three or four points off the rate it would charge for a new loan -- that is, if the lender has any cash to lend.
The all-savers certificate will expand "blend" lending by pumping more capital into the S&Ls and mutual savings banks. The 12 and 13 percent money that's around later this year may well be a direct product of the tax bill. Regular mortgage rates, on the other hand, may not go much below 141/2 to 15 percent.
Still another special category of tax bill beneficiary: homeowners 55 years or older. Rather than being limited to a one-time, tax-free "exclusion" (pocketing) of up to $100,000 of their net profits on the sale of their principal residence, they'll now be able to take $125,000 tax-free.