The Coast News Group
Financial Alternatives

Stuck in Paradise

I recently explored upgrading from my current condo into a house, but the resulting property tax and mortgage expense increase would be too great for me to justify a move. This same predicament, which I call the “golden handcuffs” provides disincentives for many homeowners to move, fanning the flames of the affordable housing shortage in North County.

The Golden Handcuffs

Home values have increased roughly 30 percent since my current condo purchase. Therefore, pound for pound, property tax on any new home I purchase would also be roughly 30 percent higher. Plus, mortgage interest rates have climbed a full 1-point (28 percent) over this same period. So even a lateral move into a new home would result in significant added expense. But in my case, an upgrade from current values of say 20 percent to buy a new house would result in property tax and mortgage expense spikes of 50 and 41 percent respectively!

For example, imagine an initial purchase price of $1 million = $11,000 in tax; a current value of $1.3 million still = $11,000 in tax (plus any modest increases since the purchase); and a new home purchase of $1.5 million = $16,500 in tax. Now layer in the mortgage cost. An $800,000, 3.5 percent, 30-year mortgage on the initial $1 million purchase price = $43,104/year vs. a $1 million 4.5-percent mortgage on a new $1.5 million purchase = $60,800/year.

This modest 20-percent upgrade would increase annual expenses by a combined $23,000 or 43 percent! And with the new tax code’s deductibility limitations for property taxes and mortgage interest this added expense is even more painful.

A few days after my realization I mentioned it to my buddy Marty who said, “My brother is in the same boat. He and his wife are now empty nesters in a five-bedroom house in Encinitas. They had always planned to downsize, but now can’t make financial sense of doing it.”

Their case was further worsened by their very low property tax basis since they had purchased their home many years earlier. Even with a downsize, they would be looking at a substantial annual property tax increase along with a big capital gains hit from their home’s appreciation. Like me, and many others they’ve decided to sit tight.

These “golden handcuffs” incentivize current homeowners to stay put which serves to further tighten housing supply and add fuel to North County’s housing affordability crisis. And unfortunately, as prices and interest rates rise, this homeowner entrenchment phenomenon could worsen.

Stuck In Paradise

Over the next year Zillow predicts home appreciation of 5% and estimates a 10% increase in mortgage interest rates. It’s no wonder that some people choose to relocate to states with less expensive housing. But leaving paradise is never easy!

In our next column we will explore little known Propositions 60 and 90 that deal with this problem by giving homeowners 55 and older a one-time opportunity to move without facing a property tax increase.

Matt is a retired stock fund manager, private investor and part-time writer. Twitter: @mbrand657

Jim Freeman is a fee-only Financial Advisor and President of Financial Alternatives in La Jolla CA
[email protected] 858-459-8289

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