What is Mansion Tax? and Why Less People Are Buying Palatial Homes
Sometime last April, a steady stream of golf carts began carrying real estate brokers and potential buyers, social media influencers and those who accompany them, and nosy neighbors just in it for the mental math up the endless driveway to the storied home at the base of a Hollywood hill. The house, 11,000 square feet on more than an acre, is objectively a stunner, a piece of Los Angeles design history that keeps the town from descending into the land of modern white-box bachelor pads that Selling Sunset would have you believe it is. Built in the 1920s, it’s all original painted wood ceilings, has a screening room modeled after Grauman’s Egyptian and Chinese Theatres, tiles and floors flown in from Italian and French villas, a koi pond, and a loggia bar inspired by the one at Musso & Frank. When the latest owner, a television writer, was ready to give it up, the real estate agent sprinkled fairy dust: The home was given a “name” with which to market it, its very own website, and a $15.5 million price tag. They parked a vintage Mercedes out front. A jazz band greeted the golf cart passengers. Champagne was passed.
In another market moment, like the previous one, the house would have flown. This past spring Los Angeles was coming off the hottest hot streak for the high-end market after a surge spurred by unprecedentedly low interest rates and a nesting effect kicked off during the pandemic. But this special house, listed on the last day of March 2023, landed right in the eye of a perfect storm: a 4 percent mansion tax on homes sold above $5 million and 5.5 percent on those sold for more than $10 million, freshly raised interest rates, and home insurers fleeing the state amid wildfire risks. And then, of course, just more than a month after the mansion tax took footing, around 11,000 writers went on strike for the first time in nearly two decades, and in short order, so did 160,000 unionized actors.
The Needs-to-Have vs the Wants-to-Have
It’s not that even a small fraction of those on strike are the ones who might be in the market for a home north of $5 million, but the strike touches all of the managers and agents and lawyers whose years depend on how much their clients are bringing in, to say nothing of the studio executives. Or the restaurant owners and designers and money managers, who feel it too.
“There is real, serious uncertainty all around, and these issues are major, major, major,” says Jenna Cooper, a real estate agent with Compass whose clients are writers, actors, talent agents, and creatives of all sorts (myself included), and who is one of the few agents with actual exquisite taste. “The strike is really a problem. The mansion tax is a real issue. The insurance situation is chaos. Add that to the fact that it’s all culminating in summer, which is a deader than dead time to sell in Los Angeles. No one who doesn’t have to sell right now is trying to sell right now.”
“Money will exist in Hollywood forever, and as long as it does, so will the appetite for a luxury home market”
As Caroline Wolf, who works on Cooper’s team, puts it, the only people who are selling are “the needs-to-have, not the wants-to-have.” If you are getting a divorce or having a baby, if someone’s died or you’ve lost your job or decided to quit the town entirely—which, in the midst of a dominant industry’s total meltdown and existential crisis, wouldn’t be crazy—then you may be moving. “Seller motivation seems like a real key factor right now. If they don’t get a certain number, then it really doesn’t make sense for them to list their houses unless they really, really need the money.”
In the run-up to the November 2022 vote, politicians stated that the mansion tax would generate an estimated $900 million per year to help fund homelessness prevention, providing several thousand new housing units and annual rental assistance. It passed with 57.7 percent approval.
Property Taking Flight
In the time between the vote and the measure taking effect, the high-end market took flight. Millions of dollars were sliced off asking prices within days. Some brokers offered sellers sports cars and reduced their commissions to virtually nothing. Buyers waived inspections entirely. Cooper and her team got an escrow done in one day, she says. Nearly 130 homes and condominiums over $5 million were sold in March, according to data from the Multiple Listing Service.
The frenetic pace stopped on a dime by April 1. Between then and June 1, only three homes in LA sold above the $5 million threshold. Meanwhile, an alliance of anti-tax and real estate groups are challenging the new tax in court as unconstitutional, and the city revised its projections down to $150 million in new revenue. Wolf explains that people buying a home in the $4 million range, even though the number is below the tax threshold, are hesitant to buy, because if the measure stays in place and they want to resell their home for a profit, they’ll have a harder time making a return.
The market only turned trickier by the end of May due to an insurance issue that dealt a blow to anyone looking for a mortgage at any level of the market. State Farm announced that it was no longer accepting new applications for home insurance in California, as a result of what it called a “challenging reinsurance market” with all of the wildfires and high construction costs hitting the state over the last years. Allstate soon followed suit. The announcements came after Allstate had asked for the ability to raise home insurance rates by 40 percent and State Farm had asked for a 28 percent increase—which would fly in the face of the state’s consumer-friendly policies that have held rates low for decades.
Having two of the state’s largest property insurers bow out means that for anyone buying a new home, premiums skyrocketed immediately. Securing home insurance is required by most lenders to get a mortgage approved, so anyone not buying with cash was now scrounging for affordable insurance. Cooper and Wolf recently closed a Los Feliz home on which the buyers had to go to 18 different insurers to get coverage and ultimately had to pay 11 times what the previous owner was paying to insure the same property. Another client had his mom comb through military documents from the 1940s to prove that his father was in the Army so that they could get a USAA insurance policy, which typically offers a lower rate.
Harvey Rosenfield, the author of a consumer-protection law in California that has saved consumers tens of billions of dollars since it was passed in the ’80s, says that insurance companies might rightfully need to raise rates as a result of extreme weather and disasters, but that “what’s happening now is they’ve seized on climate change as an excuse to get rid of restraints on their greed, using their economic might to basically blackmail the insurance commissioner and the legislature into deregulating them.” He adds that the insurance commissioner, which is an elected position, has the right to name this an emergency and use his authority to force insurance companies back to the state. The office of the commissioner, Ricardo Lara, a Democrat, did not respond to requests for comment. “What’s maddening is the question, wouldn’t it be better just paying off the thieves—the insurance mafia—for protection than being without this product that we all need to transact our daily lives? And I refuse to accept that. The voters created a system that protected them against that,” Rosenfield says.
Still, Los Angeles is a resilient market, and interest rates are not historically high. For now, the industry, however it may look poststrike and pre-AI, exists here. Money will exist in Hollywood forever, and as long as it does, so will the appetite for a luxury home market. Only the super rich will be able to afford to live in places where natural disaster is a likelihood, and so-called climate gentrification makes such places virtually unaffordable (in Florida, a $620,000 premium recently made headlines, and prices have increased almost 800 percent.)
“LA is a very dramatic place. It just kind of always is,” Cooper explains. “We feel things stronger than most people. When it’s really good, it’s really good, and when it’s really bad, as it’s been, you also have an outsized reaction to how good it was before.”
As of mid-September, that famed home of the famed screenwriter in the hills was still on the market.
This story was originally published on Vanity Fair US.