How SALT cap changes could impact real estate purchases

Patrick Fruzzetti, Hightower Managing Director & Partner, joins Yahoo Finance’s Brian Sozzi to give an insight into the real estate market as homebuyers take advantage of low interest rates and potential SALT cap changes could impact real estate purchases.

Video transcript

BRIAN SOZZI: Semiconductors aren't the only thing in short supply because of the ongoing pandemic. Housing supply remains very, very low. That has pushed up prices for new home buyers, but also provided a financial windfall for those that have long owned a home. So what moves should you be making right now?

Patrick Fruzzetti is a Managing Director and Partner at Hightower and joins us now. Patrick, nice to see you on this Thursday morning. Lots going on in the housing sector-- how should one go about buying a home in this environment?

PATRICK FRUZZETTI: Well, you know, the most important factor when I'm speaking to clients about purchasing a home, there are so many qualitative factors, right? You have to be willing to live in a place, you have to be happy. You know, obviously, if you have children, there's considerations with education. And then, of course, there's employment considerations.

But if you're going about purchasing a home today, you really have to factor in the fact that, you know, interest rates are still at an all time low. And so you should use that to your advantage as best you can. But of course, it's created a tremendous amount of competition. Oftentimes, you hear these stories anecdotally, a cash buyer came in at the last minute and took the home.

You know, so it's been very, very competitive. And as you alluded to, you know, Brian, that, you know, the average month's supply of housing is at a low. And so that's why people feel very pressured, if they're without a home, to go and buy one now.

JULIE HYMAN: And, Patrick, it's Julie here. What about the tax component? Because I know you advise wealthy individuals in particular, and you sort of anecdotally hear, right, that people are taking that into account in terms of geography when they're deciding where to buy a home. Are you finding that's the case with your clients? And do you advise them that they should take that into consideration?

PATRICK FRUZZETTI: I don't advise them so much to take it in consideration. I tell them the facts. You know, I tell them financially where we'll put them. You know, so if someone were deciding whether to live in New York or Florida, you know, you have to be willing to live with the New York winters if you select New York, right? But you know, the SALT tax deduction is the one, obviously, that's very topical.

Right now, it's sort of in front of the House and they're discussing and whether or not to extend it. And right now, it looks like they potentially could. But I just don't think it's progressive enough. I think the Democrats are going to have a very difficult time swallowing that pill.

You know, as we know, the current, you know, SALT deduction is $10,000 a year through '26 and it rolls off. And it goes back to, you know, the previous tax measure. And the current proposal is to increase that to $80,000 a year for the next four years and then going to 2031 at $10,000 a year. It's revenue neutral, but I think everything that we've found is that it overwhelmingly benefits the wealthy.

So I just don't think it's progressive enough. I guess it's a long way of saying that, you know, it's very difficult to make a decision to have your primary home in any one place based solely on taxes. You know, I think there are so many other considerations that go into it. But clearly, you know, there's a difference. If this provision does not get passed, it's significantly more expensive from a tax perspective to live in a place like New York or California relative to Florida or Texas, respectively, where we've seen a lot of migration from each of those states.

BRIAN SOZZI: Patrick, what do you tell those folks that have moved during the pandemic but now they're going back to the office? Is it time to just sell that house they bought during the pandemic? Or should they sit tight?

PATRICK FRUZZETTI: Yeah. Well, it depends whether or not they can live there. I mean, can they work remotely? I mean, so many times-- it's so situation-specific, Brian. So oftentimes, they'll say, well, look, I'd like to keep it or maybe I'll keep it as a second home. So then it comes down to a question of affordability.

We'll oftentimes revisit a financial plan for a client. And then, you know, we'll see whether it's something that's affordable if they really like the home. And they figure, hey, we'll spend a few months here every year, but I have to go closer to an urban location in order to continue my employment. So again, you know, when you're looking at each specific situation, everyone's different.

But that being said, if they purchase in a place where you've seen a lot of price appreciation, again, it's my job to deliver, you know, the facts to my clients-- and if we've seen significant appreciation, you know, you have to weigh the benefits of selling today. And again, it's something that a number of clients are going through today.

JULIE HYMAN: Have you changed-- for the folks who are working at home, or have moved, all of this-- is there anything that's changed during the pandemic in terms of how people can be planning around either rate-offs or saving up for internet at home, or home office equipment, or commuting as they go back to work? I'm just curious how you're thinking about these issues and encouraging your clients to think about these issues now.

PATRICK FRUZZETTI: Yeah. I mean, look, there is a lot of-- oftentimes when you're buying a home or you know-- as I said, we think about employment, we think about if they have children, you think about education costs and the like. You know, the other big question is if you're buying a home is how much work needs to be done to it? Right, how much money do you have to sink into it?

But now there are costs related to travel, costs related to commuting. But in the end, those costs are so minor when you line that up versus actually making an investment in a home, putting in a down payment. And so it's really key that the client-- how long do they plan to live there, right? You know, we could be in an environment if we saw rates continue to tick up and prices level out or even go down-- you don't want to be stuck in a situation where you're potentially forced to sell because, a, you're not happy, or, two, you have to move for some other lifestyle reason.

BRIAN SOZZI: All right, we'll leave it there. Patrick Fruzzetti, Managing Director and Partner at Hightower, good to see you. Have a great weekend.