The Effect of the New Tax Law on High-Income, High-Tax Areas

by Mark Pruner

mark@bhhsne.com – 203-969-7900

This will be a crucial year for high-end residential real estate. The first major rewrite of the federal tax law in decades has just gone into effect and the general consensus among the pundits is that it is not good news for the high-tax states like Connecticut. The reality is more complex than that and it might actually help towns with low property taxes like Greenwich, CT.

Loss of SALT & Property Tax Deductibility

The new law limits the deductibility of both state and local taxes (SALT) and property taxes to a combined $10,000. This means that in Greenwich properties with an assessed fair market value of more than $1.2 million will have a Greenwich property tax bill that is greater than $10,000. The result it that the majority of homeowners will have to pay a portion of their property tax with after tax dollars since that portion won’t be deductible.

As to the deductibility of the Connecticut income tax that hits $10,000 for a married couple at about $198,000 of taxable income. Another way to get to the combined $10,000 is $5,000 each which would be a $600,000 home in Greenwich and a taxable income of $107,000 for a couple. Bottom line, just about everybody in Greenwich is going to find that that a portion of their state income tax and their property taxes are not deductible and for most people it’s going to be a big portion.

But what does this lack of deductibility mean in dollars and cents. Let’s take someone who has $30,000 of combined property tax and Connecticut income tax. For them the first $10,000 is deductible and the next $20,000 dollars is not deductible. To figure how much you extra you have to pay you just multiply the non-deductible portion by your marginal federal income tax rate. So, if your taxable income in 2018 is $200,000 you would be in the 24% federal tax bracket and that lost $20,000 in deductions would mean you would be paying $4,800 in extra federal taxes.

Lower Rates and Higher Brackets

But would you really be paying this much extra? Lost in much of the conversation about lost deductibility, is that the federal tax rates have been lowered at each tax bracket and the amount at which each tax bracket kicks in has increased. In 2017, if your taxable income was $200,000 you were in the 28% marginal bracket and you would pay $42,623 in federal taxes. In 2018 with that same $200,000 of taxable income you are in the 24% tax bracket and you would pay $34,942 or $7,681 less in federal income tax.

Federal Income Tax Table 2018 vs.2017 by $100,000s

Now the Greenwich resident with $30,000 of combined SALT and property tax has to pay $4,800 more in taxes for the lost deductibility, but they saved $7,681 with the lower rates, so even in the high-tax state of Connecticut they will pay $2,881 less in taxes, because the reduction in rates and increase in brackets is greater than their loss in deductibility.

Now what I just wrote is not accurate and it is only roughly applicable to your tax situation. Federal taxes are incredibly complex and there are deductions, credits, exclusions and a myriad of other provisions that may or may not affect your individual situation. Also, all the rates are for a married couple just to simplify the analysis. All of the rates are different if you are single. So, to get a handle or your situation you need to talk to your accountant and/or tax lawyer.

What I am trying to show is that the lower tax rates and the higher bracket amounts may mean that for many people in Greenwich, even with the loss of deductibility of SALT and property taxes, that they will still pay lower taxes.

The new highest tax bracket is 37% and it kicks in at $600,000, while the old maximum rate was 39.6% and it kicked in at only $480,000. So, under the old law if you made $600,000 you paid $181,744 in federal taxes now you’ll pay $161,379 or $20,365 less. As you go higher, the savings increase, so that at $2,000,000 you save $56,765 and at $5,000,000 of taxable income you save $134,765. This makes the loss of SALT/property tax deductions a lot more palatable.

The Florida Solution

Now some folks will say that’s fine, but if I move to a low tax state like Florida, I get these lower federal tax rates and there is no income tax. This is true, but one thing to note is that many of these states have higher property taxes than in Greenwich, so it’s not an all or nothing choice. If you are thinking about moving consult your tax lawyer and your Realtor.

Of course, Greenwich has always had people who retire and move to Florida for the warm weather. So, the question is not will Greenwich homeowners move to Florida and other states, but whether the new tax law will result in a significant increase of people moving to these low tax states. For our retirees that were thinking about moving anyway, the answer may be yes, but for people with good jobs in the NY metro area and kids in school they aren’t likely to move.

Kids & Schools

The new tax law also has two significant provisions for families with kids. First, the child care credit was increased from $1,000 to $2,000 and it is a tax credit, so you get to reduce your tax bill by that amount for every child under 17. For many Greenwich families the equally important change is that the phaseout of this credit was increased from $200,000 to $400,000 so it not only doubled in amount, but will be available for many more Greenwich families.

The second big change for families with school age children is that the 529 college savings plans can now be used for private school tuition, which is big plus for Greenwich. We have ten private schools in Greenwich and they are a strong draw for families looking to live here. Being able to pay for tuition from a tax-free saving plan will mean more families will consider moving to Greenwich and its private schools.

The Westchester Effect

Property taxes in many Westchester towns can be as much as triple what Greenwich property taxes are. In addition, the NY state taxes are slightly higher with a maximum rate of 8.82% compared to Connecticut’s 6.99%. Westchester retirees are one of the main sources of buyers in Greenwich. Once they retire having to pay these high property taxes out of their savings does not look so attractive and Greenwich’s low property taxes and excellent senior services look good.

New York State 2017 Tax Table by $100,00s

As a result of the new tax law, I expect that we will see an increase in buyers from Westchester and they will be relocating at younger ages. Employed, empty nesters who are no longer tied to their children’s schools may well decide to move to Greenwich.

Westchester County also just got a new county executive. The prior county executive had held county taxes steady for five years, but something was going to have to give this year. He lost his bid for re-election and taxes are likely to go up in Westchester further encouraging folks to relocate to Greenwich.

Mortgages & Weekend Homes & Inventory

The new tax law cut the mortgage deduction from $1,000,000 to $750,000, but left in place the provision that this could be shared over two houses. Where I live in backcountry, many of my neighbors are weekenders, and if they rent in the city, they can use the full amount of the deductibility on their weekend home.  Having said that mortgage deductibility for most weekenders was not a major factor in their decision to get a weekend house.

The reduction in mortgage deductibility may play in bigger role in our level of inventory. Since all the pre-12/15/17 mortgages are grandfathered, people who have larger mortgages may be reluctant to move and lose some of their mortgage deductibility when they get a new mortgage. The loss of deductibility of the interest on a $250,000 mortgage at 4% interest is $10,000. This means an increase in federal taxes of between $1,000 and $3,700 depending on your bracket. So, any reluctance to move may be more psychological, rather than financial. The impact on Greenwich inventory may be small, but could be larger in other areas where Greenwich sellers might be considering buying.

The Economy & the Stock Market

The stock market is setting new highs nearly every week, which means that people with big stock portfolios are seeing their wealth rise. The effect on Greenwich real estate at the high end last year was dramatic with high-end sales up 30% over 2016.

Now some people would argue that this is just evidence of wealthy homeowners fleeing the state and selling their houses at a loss and you can clearly find examples of this. The flip side of this is that 150 high-end buyers decided to buy in Greenwich last year. In fact, our buyers of the five highest price homes invested over $100 million in Greenwich real estate, which is a nice vote of confidence.

Other signs of a good economy are low unemployment and record holiday sales from what was supposed to be a dying retail sector. Lastly, this new tax bill’s lower rates will result in the injection of billions of dollars into the economy further boosting the economy. The higher stock market, better economy and lower taxes are all factors pushing real estate sales higher and will particularly benefit Greenwich with it’s many people in the financial industry.

A Mixed Bag

We have a variety of factors that are encouraging sales in Greenwich and many other factors that tend to discourage sales. The situation is so complicated, that my fellow columnists, Rob Pulitano, Cesar Rabellino and I actually formed a team to help homeowners analyze how all of this applies to their situation.

What Will 2018 Bring?

Are sales and prices going up or down? The short answer is that at this point no one knows, and everyone’s situation is different. The one thing that is sure is that 2018 will set the mold for how Greenwich, and the Greenwich housing market, is perceived for many years to come. Are we going to be perceived as winners or losers in this whole situation?

Last year the town, the Chamber of Commerce and the Greenwich Association of Realtors funded a program to promote Greenwich as a place to live and do business, but money is a much more effective way to promote Greenwich. Nearly, every homeowner in town is going to have pay a significant portion of their property taxes with after tax dollars, resulting in an effective increase of 10 -37% in the cost of these taxes to these owners. If Greenwich were to announce that in sympathy with them, the town is keeping the tax rate flat, this would serve as a powerful draw for those people in Westchester and other high property tax areas. It also signals to high-end buyers that pay a lot of our taxes that they are welcome here. Lastly, it shows that the town has been a good steward of its finances and will be in the future.

The cost is only a few million dollars in a budget of over $400 million and it may have many times that effect over the next few years, if Greenwich continues to be seen as the place to live.

2017 Year End Greenwich Real Estate Report – Very Good High-End Sales

Volume Up Over $200 Million

In 2017, $1.47 billion worth of single family homes were sold in Greenwich. This is up $204 million from 2016 or a 14% increase in the total value of homes sold in Greenwich. The biggest contributor to this increase was the major rebound in sales we saw this year over $3 million dollars where sales were up by 34 houses.

Looked at another way, our biggest GMLS sale in 2016 was $16,250,000. In 2017 we had 5 sales that were greater than $16.25 million. These five sales represented more than half of our $204 million in increased sales volume in 2017. Four of these five sales over $20 million which was twice the number we had in any previous year.

 

Unit Sales

We also finished the year strong with sales increasing in each month of the fourth quarter. In December 2107 we had 51 sales which is up from our 10-year average of 49 December house sales. The stronger finish in the fourth quarter, however, did not make up for slower sales in most of the rest of the year for our under $3 million price range, where sales were down 40 sales from 2016. Over half of this sales drop, or 22 houses, was in the $1.5 – 2.0 million price range, generally one our strongest price ranges.

We still sold 94 houses in that price, it’s just that in 2016 we sold 116 houses between $1.5 million and $2.0 million. In the price range just below this, $1.0 – 1.5 million sales were actually up 3 sales to 123 houses. Part of the reduction in sales was due low inventory under $1 million.

 

Inventory

Low inventory of our most affordable housing has been a problem that Greenwich shares with the rest of the nation. Under $1 million we only had 34 houses to choose from at the end of 2017. With inventory this low buyer’s options can get very small. Once a buyer picks a neighborhood and eliminates the styles they didn’t like they may have only have a handful of houses to pick from in Greenwich.

Overall, our inventory is nearly the same as last year with 450 houses on the market, however, once again there are significant differences in our lower price ranges versus our highest price ranges. From $800 thousand to $3 million inventory is up 40 houses, while over $5 million inventory is down 35 houses.

 

As of 12/31/17 Inventory Contracts Last Mo. Solds Tot. Solds+ Contracts  YTD Solds  YTD+ Contracts Mos Supply Mos w/ Contracts Last Mo. Annlzd
< $600K 2 4 1 5 14 18 1.7 1.5 2.0
$600-$800K 16 2 2 4 44 46 4.4 4.7 8.0
$800K-$1M 16 10 3 13 46 56 4.2 3.9 5.3
$1-$1.5M 47 10 9 19 123 133 4.6 4.8 5.2
$1.5-$2M 54 9 12 21 94 103 6.9 7.1 4.5
$2-$3M 101 12 8 20 96 108 12.6 12.6 12.6
$3-$4M 59 6 4 10 59 65 12.0 12.3 14.8
$4-$5M 47 4 3 7 31 35 18.2 18.1 15.7
$5-6.5M 45 5 3 8 31 36 17.4 16.9 15.0
$6.5-$10M 32 5 3 8 21 26 18.3 16.6 10.7
> $10M 32 2 0 2 8 10 48.0 43.2
TOTAL 451 69 51 117 570 636 9.5 9.6 9.4

 

Contracts

Contracts were down from 78 at the end of 2016 to 69 at the end of 2017. A significant part of this reduction is probably due to the uncertainty with the new federal tax law. Contracts over $5 million and under $1 million are up while the reduction in contracts is between $1 and $5 million where we are down 23 contracts compared to the end of 2016. Almost half of that, or 11 contracts, is between $1.0 and $1.5 million. This is the price range that would be most affected by the new tax law’s reduction in the mortgage deduction from $1 million to $750 thousand.

When you look at the 2017 chart of sales the price range that really stands out is this same $1.0 – $1.5 million price range. There we had 123 sales with only 47 houses in inventory. We also have 10 contracts waiting to close as of the beginning of the year in this price range, however, we had 21 contracts at the beginning of 2107.

 

Months of Supply

At the high-end the result of lower inventory and increased sales is a dramatic drop in months of supply. Over $6.5 million we are down three and a half years of supply. The other remarkable thing is that months of supply is generally a relatively smooth curve from under $600 thousand where we have we have less than two months of supply to over $10 million where we have had as much as 10 years of supply, but not now.

We have about the same demand/months of supply all the way from $4 million to $10 million. When you add in the contracts in this price range this demand is likely to hold steady during the beginning of 2018.

 

Now the high end is doing much better than in 2016 and the lower half of the market is a little slower, but you don’t want to lose the forest for the trees:

  • We have 47% of our inventory over $3M, while only 30% of our sales are over that price.
  • At the other end 9% of our inventory is under $1M, while 19% of our sales are under $1M
  • The large bulk of our sales, 56%, are between $1M and $3M. These sales come from only of 42% inventory.
  • The $1 – 3M segment was even more popular in December with 61% of our sales.

 

2018

One thing you can be sure of is that 2018 will not be like 2017. The new federal tax law is going to shift real estate markets across the nation, but particularly in Greenwich. The accepted wisdom is that we are a high tax state that will see property values drop as people move to low tax states and the loss of deductibility of state taxes and local property taxes will discourage buyers.

The problem with this scenario is that New York State has higher income taxes and Westchester County towns pay much higher property taxes. Also, the new tax law has lower tax rates and higher brackets. Even with the loss of SALT and property taxes deductibility over $10,000 many folks will see their federal income taxes go down.

So how much motivation is there to move if your taxes are lower, and how many people will move from Westchester to Greenwich, and how much will a higher stock market continue to drive high-end sales and how much will inventory fall as people are concerned about buying a new house with lower mortgage deductibility?

Stay tuned 2018 is going to be an interesting year.

 

 

November 2017 Greenwich Real Estate – Sales Way Up 80% – Contracts Down 13%

Greenwich home sales were up dramatically in November. Last month we had 43 sales compared to only 24 sales in November 2016 or a jump of 80%. It seems a lot of people may have been waiting for the Connecticut budget issues to get resolved before closing.

As of 12/1/17 Inventory Contracts Last Mo. Solds Tot. Solds+ Contracts  YTD Solds  YTD+ Contracts Mos Supply Mos w/ Contracts Last Mo. Annlzd
< $600K 5 3 0 3 13 16 4.2 3.9
$600-$800K 19 2 4 6 42 44 5.0 5.4 4.8
$800K-$1M 18 8 6 14 43 51 4.6 4.4 3.0
$1-$1.5M 56 10 10 20 114 124 5.4 5.6 5.6
$1.5-$2M 59 17 8 25 81 98 8.0 7.5 7.4
$2-$3M 118 14 6 20 88 102 14.8 14.5 19.7
$3-$4M 69 7 4 11 55 62 13.8 13.9 17.3
$4-$5M 52 4 2 6 28 32 20.4 20.3 26.0
$5-6.5M 51 8 0 8 28 36 20.0 17.7
$6.5-$10M 36 7 1 8 17 24 23.3 18.8 36.0
> $10M 35 1 2 3 8 9 48.1 48.6 17.5
TOTAL 518 81 43 124 517 598 11.0 10.8 12.0

Now you would think that events that happened after the contracts were signed would not affect the number of sales in any particular month, but we see this over and over again. People wait to see what is going to happen before they set a closing. The result is that this October was only an average month while November was up almost double from last year.

The 80% jump in sales number this November compared to last November is mathematically accurate, but a little deceptive. November 2016 had the same time shifting problem with sales way down that month followed by a big jump up in December 2016. If you compare our November 2017 sales to last year you look at our 10-year average, our 43 sales are up 23% from our 10-year average of 35 sales. A nice jump, but not as dramatic as a year to year comparison.

The interesting thing is the prices where these sales increases are. In November we saw 12 more sales from $800 thousand to $2 million price range. The $1.5 – 2.0 million price range had been slow this year even with higher inventory available for purchase, so to see these additional sales was a nice November gift.

The high-end above $5 million continued to do well with 15 more contracts waiting to close compared to last year. Our high-end inventory has also been down all year and as of the end of November we had 39 fewer houses on the market than last year at this time. Our sales for this category are also 21 sales.

The result of lower inventory and substantially increased sales are massive drops in months of supply for the high-end compared to previous years. Months of supply are down from $5 – 6.5 million by 1.5 years, from $6.5 to 10 million we are down by 3 years of supply. Over $10 million we down by an amazing 6 years of supply from 121 months, or 11 years of supply to 48 months, 4 years of supply.

The over $10 million months of supply has literally been off the charts for years. It is still much higher than other price categories, but people are buying very high-priced houses in Greenwich. We doubled our record for over $20 million houses with four houses over this sky-high price.

These four houses alone represent $88 million in sales in Greenwich. So far, this year our total sales come to $1.33 billion dollars and this is in a town of 62,000 people. This compares to total sales last year of $1.15 billion. Due to the big jump in sales in November our number of house sales this year is down only 4 houses to 517 houses, while our high-end sales have increased our total volume by $180 million. The result is that our average price has gone from $2,206,908 to $2,575,130.

So, sales and inventory are about the same as last year, while high end sales and hence the average price are up substantially. Unfortunately, December promises to be another month of whipsawing sales. If you look at contracts, December sales should be down as contracts are down 12 from last year with most of that decline being, what had been up until November, our most popular price range from $1 – 1.5 million. Contracts are down 16 from last year in our prime market.

The Income Tax Bill and Real Estate

The great imponderable is the pending tax bills in the U.S. Congress. With both the House and Senate having passed bills we are only waiting for the compromise bill to come out and President Trump is waiting with his pen to sign the bill.

Now the general consensus is that property values are going to drop in states with high income taxes, high property taxes and lots of mortgages over $500,000 or $1,000,000 depending on whether the House or Senate mortgage limitation amount passes. The effective costs of property taxes and the other lost deductions will be higher as they will have to be paid with after-tax dollars. As a result, there is a good chance that we may see property values drop in Greenwich, but there is also a scenario where Greenwich house prices could actually go up.

Presently, you can deduct all property taxes from your federal income tax and both the House and Senate are proposing to limit this deduction to $10,000. So, anyone who has a property tax bill over $10,000 will see the real cost of those taxes go up next year. In Greenwich the $10,000 tax bill equates to a house value of about $1.2 million.

 Taxes & Real Estate – Greenwich Prices Up or Down

Westchester has some of the highest tax rates in the country so this reduction in property tax deductibility is more strongly felt there. For decades, downsizers and retirees have moved from Westchester to Greenwich for the substantially lower taxes. Once the tax bill passes Westchester homeowners whose jobs are in the NY metro area and thus can’t easily relocate to Florida may decide to move to Greenwich to avoid the higher taxes that will be paid with after-tax dollars.

Compounding this effect is that inventory may well drop as homeowners decide to stay in their homes to keep their grandfathered mortgages with there full interest deductions. A second, though less widespread effect, reducing inventory in our hottest areas, is that homeowners will have to occupy their houses for five years rather than two to avoid capital gains tax on the sale of their primary residence, so expanding families may well stay put longer.

Lastly, the lower income tax rates and lower taxes on pass through entities, may well mean that Greenwich buyers will not be as sensitive to the loss of deductions for SALT, higher mortgage amounts and property taxes.

We have so many moving parts in this bill and so many different household circumstances, that it is going to take a while before the factors in the tax bill pushing up and lowering demand create a new equilibrium of supply and demand for Greenwich houses. The bottomline is that there is no way of knowing how the tax bill will affect Greenwich. What is clear is that our low property taxes are a major boon in a changing world and will ameliorate whatever effect the loss of property tax deductibility will have when compared to other towns.

 

October 2017 Real Estate Report & the GOP Tax Bills Effect on Greenwich

October was a better month for sales than September with sales returning to their 10-year average. In addition, we continue to see strength in the upper end of the market above $3 million.

As of 11/1/17 Inventory Contracts Last Mo. Solds Tot. Solds+ Contracts YTD Solds YTD+ Contracts Mos Supply Mos w/ Contracts Last Mo. Annlzd
< $600K 6 0 0 0 13 13 4.6 5.3
$600-$800K 20 4 4 8 38 42 5.3 5.5 5.0
$800K-$1M 17 7 3 10 37 44 4.6 4.4 5.7
$1-$1.5M 68 18 9 27 103 121 6.6 6.5 7.6
$1.5-$2M 66 19 5 24 73 92 9.0 8.3 13.2
$2-$3M 130 17 5 22 82 99 15.9 15.1 26.0
$3-$4M 77 11 2 13 50 61 15.4 14.5 38.5
$4-$5M 59 2 4 6 26 28 22.7 24.2 14.8
$5-6.5M 55 5 3 8 28 33 19.6 19.2 18.3
$6.5-$10M 41 5 0 5 16 21 25.6 22.5
> $10M 38 1 2 3 6 7 63.3 62.4 19.0
 
TOTAL 577 89 37 126 472 561 12.2 11.8 15.6

October also continues our tradition this year of see-saw sales with alternating up and down months. Unfortunately, this see-saw effect has been taking place around a lower average. As of the end of October 2017 we have sold 470 houses compared to 552 sales last year. Only January and March of 2017 saw higher sales this year compared to last year.

Now, on the good news side, we should see an improvement for November sales. As of the end of October we had 89 contracts waiting to close compared to only 70 in 2016. Contracts are up in every price category from $800,000 to over $10,000,000 with the one exception of $4 – 5 million where they are down 3 contracts from last year.

Our under $800,000 market

Under $800,000 we continue to see significant inventory constraints. We only have 26 houses listed for under $800,000 in Greenwich. These houses that do come on the market usually sell fast and often for over list price. We have sold 51 houses under $800,000 this year at an average sales price to original list price of 95%. This compares with a median sales price to list price of 92%.

Now even in this competitive market you if you overprice a house it will just sit. Our lowest sales price to original list price in this category was 78% and that house stayed on the market for 539 days. Three other houses sold at around 84% of original list price and all three stayed on for over 300 days compared to a median of 75 days on market.

Of the 51 houses sold under $800,000, we had 13 sell at either list price or over with one of Gila Lewis’ Glenville listing going for 37% over its original list price and getting almost 2 dozen bids. As a group the house under $800,000 also sold for 15% more than their 2015 reassessment value.

October ’17 vs ’16 Inventory Contracts Mo. Solds Tot. Solds+ Contracts  YTD Solds  YTD+ Contracts Mos Supply Mos w/ Contracts Mo. Annlzd
< $600K -3 -3 0 -3 0 -3 -2.3 -1.2
$600-$800K 7 -4 -4 -8 -7 -11 2.4 2.7 3.4
$800K-$1M -5 3 -1 2 -6 -3 -0.5 -0.9 0.2
$1-$1.5M 8 2 4 6 3 5 0.6 0.5 -4.4
$1.5-$2M -2 5 -3 2 -28 -23 2.3 1.5 4.7
$2-$3M 23 4 0 4 -10 -6 4.2 3.4 4.6
$3-$4M -11 5 -3 2 2 7 -2.9 -4.2 20.9
$4-$5M 2 -3 3 0 2 -1 -1.1 1.6 -42.3
$5-6.5M -5 5 2 7 12 17 -17.9 -24.0 -41.7
$6.5-$10M -19 4 -1 3 5 9 -28.9 -35.0
> $10M -9 1 2 3 2 3 -54.2 -72.7
TOTAL -14 19 -1 18 -25 -6 0.3 -0.2 0.0

U.S. 2017 House and Senate Tax Proposals

The U.S. House and Senate tax bills have several provisions that would have a disproportionate impact on Greenwich. The proposal to lower mortgage deductible to only the interests on mortgages that are up to $500,000 has been getting the most attention, but it is not the only provision.

Mortgage deductibility

At first glance eliminating deductions on mortgages over $500,000 would seem to be a big deal for Greenwich, since so far this year only two houses in Greenwich have sold for less than $500,0000. Now if you assume an 80% loan to value ratio on the mortgage that would equate to a purchase price of $625,000.  That higher amount doesn’t provide much help since only 3% of our houses have sold for less than that.

Fortunately, the other 97% of purchases will see significantly different impacts. Obviously if you buy a home for all cash this deduction is irrelevant. The higher the purchase price the more likely the purchase will be all cash. For many people this change may push them to borrow less.

The main ameliorating factor is that there is already a $1.1 million limitation on mortgage interest deductibility, $1 million of home acquisition debt plus a $100,000 home equity line. So, what we are really talking about is that gap in deductibility between $1,000,000 and $500,000. If you assume an 80% loan, it’s those houses with a purchase prices of $625,000 and $1,250,000. So far this year, 121 of 484 houses sales fall in that gap or one-quarter of houses.

Property tax limitation

The House bill also proposes a $10,000 limit on property taxes, so houses in Greenwich over $1.2 million will see their property tax deductions limited based on our present mill rate. This provision might actually help accelerate movement of downsizers from high property tax Westchester County to Greenwich. At the same time, it would hurt Connecticut’s national competitiveness against low tax states.

Carried interests

One big factor that was left out of the proposal; any changes in taxes on the carried interest taxation. While even candidate Trump complained about taxing these carried interests at capital gains tax rates, leaving this policy unchanged will help mean many of our residents and prospective residents.

Capital Gain on Sale of Residence

On the downside, there is a proposal to change the $500,000 capital gains tax exemption for personal residents from a 2 out of the last 5 year owner occupancy requirement to 5 years out of the last 8 years. In addition, the proposal includes a phaseout for those families earning over $500,000 so that if you earned over $1 million a year you would get no capital gains exemption. This change will push more people to rent rather than buy if they might occupy their house for last than 5 years.

Now the bottom line is that these are just proposals and we can expect substantial changes as this legislation goes through the Washington sausage making machine. In addition, the interaction of all of these factors is complex, with increased standard deductions, reduced tax brackets and dozens of other details impacting each household differently, so to say this will help or hurt any particular Greenwich residents you just can’t say.

So, contracts are up, we have a Connecticut state budget that is better for Greenwich and we’ve got tax changes proposed in D.C. Things will continue to change and only the future can tell what will happen.

 

September 2017 – A Good Month for the High End & Greenwich Neighborhood Analysis

For the last three months we’ve had a real estate market that we haven’t seen post-recession; a good high-end and a mediocre middle. September took that up a notch. First the poor news, from $600,000 to $3 million sales are down. Under $600,000 we have no inventory. (Well, OK we do have three listings, but we had 8 listings last year). The demand is certainly there as even with this lower inventory we have the same 13 sales that we had last year.

Now for the good news; sales over $3 million are doing much better than last year. So far this year, the GMLS has reported 114 sales over $3 million up from 95 house sales last year. Some of the high-end price ranges have been particularly outstanding.

Between $ 6 and 7 million our inventory is down by a quarter and sales are up by 500%.  That calculation came from my fellow agent, Jill Marchak, here at Berkshire Hathaway, who does the internal market numbers for our Greenwich offices. The percent increase was so surprising that she initially thought it must be wrong, but sales really did go from an anemic 2 sales last year to 12 sales this while inventory dropped to only 20 listings even though this is the peak of fall market.

10/06/17 Inventory Contracts Last Mo. Solds Tot. Solds+ Contracts  YTD Solds  YTD+ Contracts Mos Supply Mos w/ Contracts Last Mo. Annlzd
< $600K 3 0 2 2 13 13 2.1 2.4 1.5
$600-$800K 20 6 0 6 34 40 5.3 5.3
$800K-$1M 16 7 2 9 34 41 4.2 4.1 8.0
$1-$1.5M 73 15 6 21 94 109 7.0 7.0 12.2
$1.5-$2M 83 14 6 20 68 82 11.0 10.6 13.8
$2-$3M 135 14 4 18 77 91 15.8 15.6 33.8
$3-$4M 86 8 3 11 47 55 16.5 16.4 28.7
$4-$5M 59 3 3 6 22 25 24.1 24.8 19.7
$5-6.5M 57 4 3 7 25 29 20.5 20.6 19.0
$6.5-$10M 45 4 4 8 16 20 25.3 23.6 11.3
> $10M 37 0 1 1 4 4 83.3 97.1 37.0
                   
TOTAL 614 75 34 109 434 509 12.7 12.7 18.1

And, in the first few days of October, the hits just keep on coming. We had 116 Oneida close for $20,377,000 on 10/3 and then 50 Byram Drive closed for $12,650,000 on 10/5. The high end is definitely chugging along. Inventory is down in ever price category over $3 million and as mentioned above sales are up.

Unfortunately September 2017 was the third consecutive month of below average sales numbers and have cancelled out the good sales months we saw earlier this year. We are now down 5% in total unit sales year to date. Despite this drop in the number of houses sold, however, we are up about 5% in sales volume as these increased high-end sales have powered the total dollar value of all sales upward.

As I mentioned this time last month, September was likely to be a down month as contracts were down 29% year over year. This month contracts have recovered very nicely with contracts down only 3 houses when compared to the beginning of October 2016 or 4%. One of the places contracts saw a nice recovery was our busiest segment from $1 – 1.5 where we are actually up to 15 contracts which was 4 more than in early October last year.

The only major drop in contracts was from $600,000 – $800,000 where we are down 7 contracts from 13 contracts last year to only 6 contracts this year for that price range. With only 20 total listings I wouldn’t expect that category to be recovering quickly.

’17 vs ’16 Inventory Contracts Mo. Solds Tot. Solds+ Contracts  YTD Solds  YTD+ Contracts Mos Supply Mos w/ Contracts Mo. Annlzd
< $600K -5 0 0 0 0 0 -3.46 -4.04 -2.50
$600-$800K -2 -7 -5 -12 -2 -9 -0.21 0.54
$800K-$1M -2 0 -5 -5 -5 -5 0.08 -0.01 5.43
$1-$1.5M 15 4 -6 -2 -1 3 1.49 1.29 7.33
$1.5-$2M 17 -4 -6 -10 -25 -29 4.60 4.38 8.33
$2-$3M 21 0 -3 -3 -10 -10 3.99 3.73 17.46
$3-$4M -7 0 -1 -1 4 4 -3.00 -2.73 5.42
$4-$5M -2 -1 1 0 -1 -2 0.27 1.06 -10.83
$5-6.5M -3 3 0 3 10 13 -15.48 -18.74 -1.00
$6.5-$10M -16 2 3 5 6 8 -29.59 -29.75 -49.75
> $10M -7 0 0 0 0 0 -15.75 -18.38 -7.00
                   
TOTAL 9 -3 -22 -25 -24 -27 0.84 0.81 7.26
Percent 1.5% -3.8% -39.3% -18.7% -5.2% -5.0% 7.1% 6.9% 67.2%
    Pro-Seller Pro-Buyer            

The mood in the marketplace varies but one thing that seems to apply across a broad range of prices is that buyers are just being more thorough. They are going to more open houses and feel that they have to see everything in their price range to make sure that haven’t missed anything before they put in an offer. All this research and legwork does mean that when something new comes on that they see as a good value, buyers can move quickly. Of our 491 sales and pending contracts so far this year 101 of them went to a binding contract in less than a month.

When you look at our months of supply what is generally a smoothly rising curve from only a few months of supply under $600,000 to many years of supply over $10 million is not smooth this year. We actually have a stair step arrangement with $1.5 – 2 million being a transition zone from a seller’s market to more of a buyer’s market. Activity at the $2 million dollar range which is usually more than at higher price, this year is about the same as around $4 million.

From $4 – 5 million we have about the same supply and demand as last year which works out to be about 24 months of supply. Then we meet the high-end sweet spot that has expanded from $5 – 6.5 million to go all the way up to $10 million. When you throw in the 4 contracts from $6.5 – 10 million we actually have a busier market from that lofty price range than we have from $4 – 5 million.

At the high-end the steadily rising stock market seems to be really helping out as people look to diversify their portfolios and take some of their gains off the table and put them in real estate. In the middle, the bread and butter of Greenwich’s real estate market, our state legislature is sowing doubt and confusion (and Washington isn’t helping either.)

Our contracts indicate that October should be a return to more normal sales, not the nearly 40% Y-O-Y drop in monthly sales that we saw this September. If the Connecticut legislature and the governor can get together on a budget deal, we still have a good shot at an excellent 4th quarter, but if we get past this week without a budget, the fourth quarter will be a struggle. I’m hoping for the best.

 

How’s Your Neighborhood Doing

 

Section No. of Sales  Avg. Sales Price  Avg. $/sf  Avg. Sales$/Assmt   “Change %”  Avg. of SP/OLP  Avg. DOM  Avg SF
Banksville 1  $      1,150,000  $ 402      1.44 1%              0.92       204     2,864
Byram 10  $         704,275  $ 405      1.93 36%              0.94       256     1,728
Cos Cob 41  $      1,378,058  $ 459      1.64 16%              0.91       166     3,104
Glenville 34  $      1,092,735  $  415      1.57 11%              0.96       140     2,705
North Mianus 6  $      1,348,583  $ 447      2.28 60%              0.96       128     3,071
North Parkway 28  $  3,540,350  $ 478      1.21 -15%              0.80       415     6,336
Old Greenwich 55  $      2,551,993  $ 710      1.64 15%              0.90       185     3,565
Pemberwick 9  $          719,586  $ 459      1.83 29%              0.91       126     1,618
Riverside 75  $      2,410,715  $  612      1.64 15%              0.92       163     3,766
South of Post Road 42  $      3,037,977  $  671      1.65 16%              0.92       155     4,227
South Parkway 131  $      3,193,294  $  601      2.20 55%              0.89       237     5,232
Total 434  $  2,502,444  $576      1.73 22%              0.90       203     4,147

If you look at the sales year to date some interesting numbers emerge. As of the end of September we had 434 sales down slightly from last year. The most sales were in the South of the Parkway area that runs from the Parkway all the way down to the Post Road so you would expect that area to have the most sales. The second and third most were in Riverside and Old Greenwich which are seeing a disproportionate number of sales given the number of listings.

North of the Parkway still retains the highest average sales price at $3.54M, but it also has the lowest appreciation (actually a depreciation of 15%). The way the appreciation is calculated here is to take the sales price and divide it by the assessment and then divide that by 0.7 (the town’s assessment ratio).

The assessment is supposed to be 70% of the fair market value of the property as of October 1, 2015. So, what we are looking at is two years of price changes in the “Appreciation” column. Whether you have a low appreciation or a high appreciation you need to take these numbers with a large grain of salt. According to this calculation houses that sold in North Mianus have appreciated 60% since 10/1/15 and they have not. First off there are only 6 houses that have sold in North Mianus this year and second and most importantly, these figures also include new construction and major renovations which throws these numbers out of whack. A better way to look at this “Appreciation” is to use it as an indicator of where the most activity is.

One way to see if this appreciation/activity number is in the ball park is to look at the sales price to the original list price. So far this year, Glenville and North Mianus are seeing houses go for 96% of the original list price. At the other end, North and South of the Parkway are both under 90% of the original list price.

Pemberwick has the fewest days on market and also the next to lowest average price, which you would expect to go together. Pemberwick also has the smallest average house size at 1,618 s.f. Backcountry, as you might expect is at the other end of square footage with the average house there being 6,336 sf.

 

 

 

 

 

Backcountry Greenwich vs. Midcountry Greenwich, CT 2000 – Sept. 2017

Backcountry Greenwich gets a lot of attention in town for its 4 acre zoning and some very high sales prices, but there is another area in town that is similar, has more sales and for the moment a higher average price and that is the 2-acre zone. The RA-2 zone runs along the south side of the Merritt Parkway about halfway down to the Post Road. It also includes three small areas; a section just west of the Merritt Parkway on the NY border, the area around Field Point Circle and an area on Mead Point. These last two areas account for some major high-end sales, but in any given year only contribute a handful of sales. So for most purposes the 2-acre zone is a stand-in for upper mid-country.

In the RA-2 zone the floor area ratio is 9% versus 6.25% for the for 4-acre zone. This means that the above ground portion of the house is limited to 9% of two acres or 7,841 s.f.   The FAR does not count the size of the basement, so developers these days include a fully finished basement often with 10-foot ceilings. The size of the resulting structures is usually in the 8,500 s.f. to over 10,000 s.f. Given that only 16 out of 437 houses that have sold this year are larger than 10,000 s.f. the bottomline is that most people can get a house as big as they want in the 2-acre zone.

Greenwich Zoning Map

With one notable exception the average sales price in backcountry and mid-country have fought each other for pre-eminence from 2000 to the present. Some years mid-country had a higher average price other times it was backcountry. The one exception is the period from 2006 to 2010 when the average sales price in backcountry exceeded mid-country’s average sales price by as much as $1.78 million in 2009.

The 2017 average priced house in the RA-2 zone is $3,158,622 this is down from  $3,347,559. The least expensive house in RA-2 zone sold so far this year sold for $935,000 for a house on a non-conforming 3-acre lot, while the highest sale was for $13,065,000 for a house on an 8.1 acre lot on Meadowcroft Lane. We are seeing an uptick in demand for the 2-acre zone as some people who pre-recession might have bought in the 4-acre zone north of the Merritt Parkway now want to live closer to town on somewhat smaller lots and the 2-acre zone meets their needs.

Greenwich Mid-Country Sales, Average and Median

Post-recession the number of sales in the RA-2 / Mid-country area averaged 89 sales each year with a total sale volume averaging $320,000,000. The average sale price in the RA-2 zone in 2017 has been $3,158,622. This is down slightly from 2016 where the average sales price was 3,347,559.

The average price for a single family home in the RA-2 zone in 2015 was even higher at $3,921,555, but this apparent drop in the value of house in the RA-2 zone is more attributable to the change in the mix of what is selling rather than a drop in all house values. From year to year each individual price range may be up or down resulting in change in both the average and the median price.

In addition, the very highest price range, the over $10 million market, has a disproportionate influence on the average. For example, the highest sale in 2015 was for $26,000,000, while in 2017 our highest sale so far in the RA-2 zone has been for “only” $13,065,000 or just half of the highest sale in 2015. From 2000 to October 2017 our highest sale, with one exception was the Helmsley place which sold for $39,500,000.

These very large sales can significantly distort averages from year to year. The one exceptional sale that show this is the sale of Copper Beach Farm, a 50 acre estate on Long Island Sound that sold for $120,000,000 or more $80 million more than any other residential property in Greenwich. That property has been excluded from this analysis as including it would have single-handily raised the average sale price of all RA-2 sales for 2013 by $1.3 million.

Another factor that plays into a market analysis for the subject properties is that these properties are new construction and there is greater demand for new construction and much less inventory.

 

From 2000 to 2007 we averaged 10 new houses a year in the RA-2 zone sold on the Greenwich MLS. From 2011 to 2017 we have averaged only 3 new houses a year in the RA-2 zone. Now this only counts the house that were publicly listed, so called “spec” houses. In fact. in 2013 not a single new house was built for speculative sale in all of the RA-2 zone. At the same time there were dozens of custom houses built for individual owners.

The problem was not a lack of demand for new spec homes. New houses in the RA-2 zone sold for an average of $90/s.f. more than previously occupied houses in that zone so people were willing to pay a premium for new homes. The problem has been financing. Getting financing for owner-occupied housing has not been a problem, but it has been for speculative houses.

Overall demand in the RA-2 zone has been good all the way up to $6.5 million. Generally, we see months of supply rising from the lowest to the highest priced home going from 3 – 5 months of supply under $1 million to several years of supply over $10 million. (see Appendix XII.B. below.)

 

RA- 2 zone

(As of 9/2/17)

Inventory Contracts Last Mo. Solds Tot. Solds+ Contracts  YTD Solds  YTD+ Contracts Mos Supply Mos w/ Contracts
< $600K 0 0 0 0 1 1 0.0 0.0
$600-$800K 0 0 0 0 0 0
$800K-$1M 0 0 0 0 1 1 0.0 0.0
$1-$1.5M 9 1 0 1 9 10 8.0 8.6
$1.5-$2M 18 0 1 1 11 11 13.1 15.5
$2-$3M 34 1 0 1 16 17 17.0 19.0
$3-$4M 28 1 0 1 11 12 20.4 22.2
$4-$5M 10 0 0 0 5 5 16.0 19.0
$5-6.5M 20 1 1 2 8 9 20.0 21.1
$6.5-$10M 21 2 1 3 2 4 84.0 49.9
> $10M 14 0 0 0 1 1 112.0 133.0
TOTAL 154 6 3 9 65 71 19.0 20.6

 

In the RA-2 zone we see a similar pattern with one anomaly. Sales from $4 – 6.5 million in the RA-2 zone are doing particularly well in the 2-acre zone and as they have in the rest of the town. The steady rise in the stock market over the last 12 months, regularly setting new record highs, has encouraged buyers with substantial portfolios to buy this year. Sales have climbed through the year in the high-end price ranges as the year goes on.

This is reflected in the months of supply for the price range from $5 – 6.5 million which is down 24 months this from 44 months last year to only 20 months of supply. A drop in months of supply by two years is a dramatic drop. Now 20 months of supply might seem like a lot of months of supply, but the higher the price the longer that houses take to sale leading to these higher numbers. The drop in inventory and increase in sales in this price ranges shows a competitive market.

Guide to Organizing a House Hunt and Buying the House You Want

Buying a house can be one of the most fun things that you do in your life. How often do you get to go out and look at million and multimillion dollar properties and buy them. It outranks jewelry and cars by an order of magnitude in usefulness and price. Unfortunately, for some people it can also be one of the more tension-filled and miserable experiences of their life. Some people who start out happy end up miserable. This often happens if people don’t have a plan and start coming up against time barriers.

Figure out what it is that you need in your new place. Is it more bedrooms? Is it more space for her favorite hobby? Is it less hassle for maintenance? The next thing to do is to figure out what you like, what you like to do and what you’d like to have in your house so that you can do those things that you want to do. Do you like to have friends over and entertain? Do you like to go away for long weekends? Do you want to be able to hang out in the backyard without nosy neighbors?

If there are two or more of you, each of you can make a list of want’s and don’t wants and compare them. Often people will find a common denominator and things they hadn’t thought of. The next thing is to check with your Realtor and your mortgage company. Get an estimate of what you can afford and take a look at houses in that price range either in person or online to see if they meet your needs. If you are in a competitive market segment, then do more than get an estimate, pay the application fee and get pre-approved.

Bing.com’s birds eye view can help give you feel for the neighborhoods before you head out. When you do go out don’t so much look at houses as look at neighborhoods and see if those are the areas where you would like to live. This newspaper publishers a weekly open house list, and I, and a lot of other folks will send you a list of open houses for each week. So check out the open houses and get your agent to show you the houses that look interesting. You shouldn’t let all this be a straitjacket but you also shouldn’t be going from Byram to Banksville and from Old Greenwich to Quaker Ridge to find a house.

Once you get to a house ignore the furniture. Unless you have identical taste to this homeowner try to imagine what the house would look like furnished to your taste. One of my favorite examples of how not to do this was when I was out a public open house checking out some houses that I had gotten around to see. As I was walking down the upstairs hallway I heard a voice coming from the master bedroom that said, “Honey we could never live here this house has a blood-red bedroom!”. If you were planning on renovating anyway don’t be put off by small dark rooms. They can be opened up with a few extra windows, sliding glass doors and/or moving a walls. The one thing you should look at is ceiling height, because that can be easily changed.

If you like the house check out the basement. If it’s unfinished you can check for cracks in the foundation; minor vertical cracks are usually not a big issue while wide horizontal cracks may mean you should move on to a another house   Another thing to look for is efflorescence. When concrete gets wet some of the lime is leached to surface and leaves a fluffy mineral deposit.  Even if the basement is dry now, it’s worthwhile to find out why those lime deposits are 3 feet up the wall.

Even for a new house, you want to set aside some funds to get the house just the way you want. For an older house you can get a real bargain if you’re willing to do some work to fix it up to your taste. Lots of people are unwilling to take on a large renovation challenge, so if you are, you have a leg-up on the competition.

If you’re not finding what you want you should revisit that table you made of what it is that you’d like to see in the house and also consider some more financing options. In Greenwich, in particular, everything from artwork to stock portfolios, to rich relatives can be helpful in deciding how much you can spend.

Mark Pruner is part of The New Team at Berkshire Hathaway. He can be reached 203-969-7900 or mark@greenwichstreets.com