Greenwich Real Estate Sales – After the New Tax Law

We have good news; the sky is not falling. So far this month, we have sold 24 houses in Greenwich in a cold winter. Our 10-year average for January sales is 36 sales so we are two-thirds of the way there with a week to go. These 24 January sales are also spread around town with concentrations in Pemberwick, Riverside and Cos Cob.

The prices are also spread out and the high-end continues to do well. We had two sales over $10 million dollars. On January 3rd, 11 French Road sold for $12,075,000 after being on the market for 406 days at a list price of $9,395,000 or nearly $2.7 million over list price. While our ultra-high end market has heated up, it’s not quite that hot. The sales price includes additional land also. The other sale over $10 million dollars was 11 Skyridge Road which sold for $11.1 million dollars after 130 days on the market. Eleven certainly seems like a lucky number.

Now both of these contracts were signed last year, so you might argue that the new tax law that came in to effect on January 1st, was not a consideration, but 11 Skyridge Road went to “pending” i.e. non-contingent contract status on 12/19/17 just before President Trump signed the new tax bill into law.

A better indicator of how the new tax bill is affecting Greenwich sales may be contracts. At the present time, we have 62 contracts outstanding; 26 contingent contracts and 36 pending contracts. At the end of January 2017, we had 69 contracts outstanding and we had 67 contracts outstanding at the end of January 2016, so we are right in the ball park.

If you look just at the contracts that have been signed since December 1, 2017 there are 39 contracts or 63% of our contracts are of recent vintage and the contracts are all over town.

We have a fair number of contracts in our 2-acre and 4-acre zones, which is the high rent district. Three of the contracts are for listings that are on for over $5 million and 22 of the 39 contracts are over $2 million dollars. This is above our last year median price of $1.8 million dollars, so our median price should continue its upward trend.

Now a few weeks of sales and contracts do not make a clear trend, but our market is humming along. You can also look at the other end of the pipeline and see what is coming on the market. There we also don’t see panic listing. We have 443 single family homes on the GMLS right now, which ain’t a lot of listings. This time of year is always the low point in the inventory as people are just beginning to add new listings in anticipation of what to my mind is really the late winter market as February doesn’t feel like spring, but being marketers, the spring market just sounds better.

So just before the spring market we have the aforesaid 443 home listings. This compares to 447 listings at the end of January 2017 and 460 listings at the end of January 2016. Once again, we are right in the ballpark and we are not seeing a rush of people desperate to get out of town. Of our current 443 listings only 31 came on in January.

So at the moment it looks like business as usual with continuing strengthening in the high end.

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.