The 10-year yield pulled back from its recent upward trend this past week.  In some ways there was little change.  The economy continues to produce good results, employment numbers look good, a new FED Chair was announced, and the FED is expected to raise rates in December.

However, there was this other announcement that should grab the attention of all.  The proposed tax reform was presented as this wonderful approach to increase our productivity.

Some highlights or lowlights depending on your view:

• Corporate tax rates are being reduced.
• Tax brackets are being reduced from 7 to 3.
• Mortgage Interest Deduction reduced to $500,000 (existing loans would be grandfathered at $1,000,000).
• Cap on the State Property Tax deduction limited to $10,000.
• The Estate Tax Exemption will be increased to about $11,000,000 from $5.49MM per person.  In addition, the plan is to completely get rid of this tax over the next 6 years.

This is just a summary of the proposal.  I imagine that there will be considerable pushback coming from those affected most.  The first two items I can understand.  At a high level, we should want to make it so US businesses can compete and flourish.  The concept being that would then create higher wages and better jobs.  And simplifying the tax brackets is fine.

The problem with all of this is that there are tradeoffs.  Regardless of what version of tax reform that gets eventually passed, there will be winners and losers.  Right now, the losers seem to be the states with high property values.  For those of us in the SF Bay Area, it is quite possible that our real estate equity is under attack.

The Mortgage Interest Deduction and the Property Tax Deduction changes should affect our real estate market.  It is difficult to see how these changes will promote more movement within the state.  Thus, our inventory will still have pressure on it.  A low inventory or limited supply should keep prices high.  However, it will now take more money to buy homes in the Bay Area as the write-offs will be reduced.  Therefore, one would surmise that the demand will drop which should lead to less upward price pressures.

Right now, none of this is cast in concrete.  However, there are elements of this that seem strange.  I am well aware that we have massive debt that somehow needs to be reduced.  I am troubled by a proposal that includes a massive benefit (the proposed estate tax change) that benefits only the wealthiest of the wealthy.  And, I do realize that much of America sees the real estate values on the West and East Coasts; and they must think (at some level) that they are being cheated out of their fair share.

Like I stated above, there will be winners and losers.  This is just starting to play out; and I am not sure how much we are going to like the ending of this play.

Okay, enough of this for this week.  As always, feel free to give me a call with any of your strategic financing needs.