Top issues to watch in 2018 Miami real estate

(Re-published from coconut grove realtor Magazine Jan 2018 – Written By Joe Ward)

Every new year brings with it changes to housing markets, consumer preferences and how real estate professionals conduct business, and 2018 is no exception. It’s a year that will see sweeping federal changes take hold, as well as a number of local and regional changes that will impact housing markets in ways both big and small. From tax reform to rising interest rates to the impact of a potential major corporate relocation, here are some of the issues that will have the biggest impact on South Florida real estate in 2018.

Tax reform

Early drafts of Congress’ tax reform efforts gave cause for concern to many real estate professionals. The National Association of Realtors decried early versions of the bill in no uncertain terms, calling them an “assault on housing” and saying they rewarded renting over homeownership.

Some of those early provisions were left out of the final bill: tax exemptions for capital gains on the sale of a home were preserved and the original proposal to cap the mortgage interest deduction at $500,000 was eventually moved to $750,000. The capping of state and local tax deductions at $10,000 was one early provision that made it into the bill President Donald Trump signed on Dec. 22.

And while some of the pricier communities in the Miami area will no doubt be affected by the reduced mortgage interest deduction, the state of Florida is somewhat insulated from the negative consequences of the tax bill.

“Florida is in a pretty good position because we don’t have state income tax,” said Maria Wells, Florida Realtors president. “The $10,000 [state and local tax deduction cap] will cover most homeowners, especially for affordable housing. For second home markets or more expensive markets, it’s another story. I don’t think it’s going to be too discouraging for first-time homebuyers because the $10,000 should cover their property taxes.”

And while most property taxpayers in Miami will be able to deduct the full tax amount on their federal taxes, residents of other high-tax states will not. That might cause more residents from the Northeast and beyond to consider moving to Miami. The tax savings for those who make such a move might even be greater with the new legislation, and more wealthy transplants would in turn be a boon to the Miami housing market.

With its low taxes, “Florida saves itself,” said Nelson Duque, senior managing director for Fortune International Realty. “Every place but us, it’s looking worse. In New York, it’s 20 degrees. Miami doesn’t have an income tax [like New York City does]. Why wouldn’t they consider moving here?”

The bill will mean different things to different people. The overwhelming majority of the country won’t be impacted by reducing the mortgage interest deduction from $1 million to $750,000, seeing as the median mortgage in the country is closer to $200,000. Miami’s luxury homebuyers would theoretically be most impacted by these provisions, but the impact isn’t likely to slow demand, said Jill Penman, principal real estate agent for Jill Penman Group. Plus, those wealthy homebuyers will likely see savings from other provisions in the tax bill that can offset the increases in homebuying.

“I don’t expect this to be a big issue for many homebuyers in such an affluent market like Miami, but the optics of it could stall some buyers on the fence, especially newbies,” Penman said. “In the long term, though, this, in my opinion, was a fringe benefit of homeownership, and the other benefits of homeownership beyond a tax deduction will keep demand strong.”

Local tax issue

There is a tax issue that is unique to Florida, and its residents will decide its fate in the November elections.

A constitutional amendment that limits how fast a home’s assessed value can rise from year to year will sunset in 2019. But legislators approved another constitutional amendment that will ask Florida voters to rescind the rule or make it permanent, and the question will be posed to midterm voters in November. The amendment will need be to be approved by 60 percent of voters in order to be enacted.

The amendment would allow for an additional $25,000 homestead exemption for properties valued at more than $100,000 and would make permanent a 10 percent cap on annual increases in assessment for non-homestead properties, which are big business in Miami real estate. The Florida Association of Realtors has launched an ad campaign championing the amendment, saying it would prevent property taxes from skyrocketing in areas where property values have soared.

“Amendment 2 really is good for everybody because if the non-homestead tax cap expires in 2019, every Floridian will be negatively impacted in some way,” Wells said in a press release. “Whether it’s a business having to increase the cost of their goods and services or tenants having their rent go up a significant amount, communities across the state will suffer.”

Inventory

The Miami area is dealing with inventory problems on two different fronts. On one hand, some parts of the metropolitan area are oversaturated with condos, with overbuilding a persistent issue. In other areas, there isn’t enough affordable housing to go around.

“Definitely we still have very tight inventory, especially in affordable housing,” Wells said. “It makes it difficult for first time buyers, but also for those who are in those homes, and where are they gonna go if they sell their homes?”

The issue has been compounded by the number of single-family homes being rented out. In Miami-Fort Lauderdale, 20.5 percent of single-family homes were rented in 2016. Of that share, 29.7 percent were homes in the least valuable third of the market. Much of the existing affordable housing stock is being converted to rentals, leaving many who want to buy with nowhere to turn.

Of the new units added in the Miami area, many weren’t built for the population that needs them the most. A report by the Miami Herald shows that high-rent unit construction is vastly outpacing affordable unit construction.

“We have a surplus of condos and new construction in Miami,” Penman said. “You just see building after building, especially in Edgewater, Brickell, downtown. You price those above market and they just sit for months and months.”

The supply problem is not new to Miami, but a correction is in the works, Duque said. Once those prices come down, they may become more affordable to the populations looking for homes. Competition among sellers will always be beneficial the buyer, he said.

“There’s no doubt that there’s a lot of supply. At the end of the day there’s a lot of good supply,” Duque said. “For your regular, standard units, there’s going to be a slowdown. The problem is that they were built in the same locations. So now [buyers] can figure out, what’s a good unit? Who’s a good developer? Who has good amenities? Your buyer today has the advantage to be able to pick between buildings and sit and wait for somebody to accept an offer. In the luxury market, sellers are gonna be more realistic with pricing.”

Insurance issues

The increasing frequency and strength of tropical storms has hurt homeowners’ pocketbooks, but one insurance scam in particular is drawing the ire of real estate professionals.

It’s known as assignment of benefit. What happens is, typically after a storm causes damage to a home, a vendor will agree to fix the problem if the homeowner signs over the insurance benefits they may receive from the damage. It might sound like a good deal, but vendors often take advantage of the agreement by inflating the cost of their services and in some cases doing shoddy work, according to a report in the Florida Sun-Sentinel.

The report shows that the average vendor claim under this agreement was $17,000, a whopping 50 percent more than non assignment of benefits claims. And that’s not the only cost associated with the agreement: the number lawsuits over the claims jumped from 405 in 2006 to over 28,000 in 2016. And, of course, the inflated claims made to insurance providers in turn drives up insurance rates for homeowners.

“That’s one of our major issues we’re working on,” Wells said. “What happens is the costs have been very much inflated. If the insurer doesn’t want to pay, then there’s litigation. Litigation is very expensive. The costs get passed on to the homeowner.”

A number of prominent Florida officials, including the state’s Chief Financial Officer Jeff Atwater, have called for legislation regulating this practice. The Florida Chamber of Commerce has launched an ad campaign that seeks protections for homeowners against assignment of benefits fraud.

Another piece of legislation pertaining to home insurance will need passing in 2018, but it will require the attention of national lawmakers. The National Flood Insurance Program has been extended through Jan. 22, and if it is to be reauthorized, it must be done no later than Jan. 19. Failure to come up with a long-term solution will not help Miami-area homeowners who are facing storms of increased veracity and frequency. Wells said she hopes an agreement is reached during Congress’ budget process early this year.

“At this point, all bets are off,” she said of the NFIP. “It’s a very complicated subject. How it gets resolved, I don’t know. It definitely has to be a concern.”

Duque said expansion of the legislation would be nice, but the federal government has to take climate change seriously if it wants to really protect homeowners. “The problem is not just insurance, it’s the much bigger conversation. We have to really put some federal dollars to fix the problem. We throw money into insurance to fix the damage but not fix the larger problem.”