Starting late last year, some predicted that the 2018 tax changes would cripple the housing market. Headlines warned of the potential for double-digit price depreciation and suggested that buyer demand could drop like a rock. There was even sentiment that homeownership could lose its coveted status as a major component of the American Dream.
Now that the first quarter numbers are in, we can begin to decipher the actual that impact tax reform has had on the real estate market.
1. Has tax reform killed off home buyer demand? The answer is “NO.”
According to the Showing Time Index which “tracks the average number of buyer showings on active residential properties on a monthly basis” and is a “highly reliable leading indicator of current and future demand trends,” buyer demand has increased each month over the last three months and is HIGHER than it was for the same months last year. Buyer demand is not down. It is up.
2. Have the tax changes affected America’s belief in real estate as a long-term investment? The answer is “NO.”
Two weeks ago, Gallup released its annual survey which asks Americans which asset they believed to be the best long-term investment. The survey revealed:
“More Americans name real estate over several other vehicles for growing wealth as the best long-term investment for the fifth year in a row. Just over a third cite real estate for this, while roughly a quarter name stocks or mutual funds.”
The survey also showed that the percentage of Americans who believe real estate is the best long-term investment was unchanged from a year ago.
3. Has the homeownership rate been negatively impacted by the tax changes? The answer is “NO.”
Not only did the homeownership rate not crash, it increased when compared to the first quarter of last year according to data released by the Census Bureau.
In her latest “Z Report,” Ivy Zelman explains that tax reform didn’t hurt the homeownership rate, but instead, enhanced it:
“We have been of the opinion that homeownership is most highly correlated with income and the net effect of tax reform would be a positive, rather than negative catalyst for the homeownership rate. While still in the early innings of tax changes, this has proven to be the case.”
4. Has the upper-end market been crushed by new State and Local Taxes (SALT) limitations? The answer is “NO.”
Sales between $500,000 and $750,000 were up 4.5% year-over-year
Sales between $750,000 and $1M were up 15.1% year-over-year
Sales over $1M were up 17.3% year-over-year
5. Will the reforms in the tax code cause home prices to tumble over the next twelve months? The answer is “NO.”
According to CoreLogic’s latest Home Price Insights Report, home prices will appreciate in each of the 50 states over the next twelve months. Appreciation is projected to be anywhere from 1.9% to 10.3% with the national average being 4.7%.
The doomsday scenarios that some predicted based on tax reform fears seem to have already blown over based on the early housing industry numbers being reported.
Home values have risen dramatically over the last twelve months. In CoreLogic’s most recent Home Price Index Report, they revealed that national home prices have increased by 6.7% year-over-year.
CoreLogic broke down appreciation even further into four price ranges, giving us a more detailed view than if we had simply looked at the year-over-year increases in national median home price.
The chart below shows the four price ranges from the report, as well as each one’s year-over-year growth from February 2017 to February 2018 (the latest data available).
It is important to pay attention to how prices are changing in your local market. The location of your home is not the only factor that determines how much your home has appreciated over the course of the last year.
Lower-priced homes have appreciated at greater rates than homes at the upper ends of the spectrum due to demand from first-time home buyers and baby boomers looking to downsize.
If you are planning to list your home for sale in today’s market, find a local agent who can explain exactly what’s going on in your area and your price range.
There is no doubt that theprice of a home in most regions of the country is greater now than at any time in history. However, when we look at the cost of a home, it is cheaper to own today than it has been historically.
The Difference Between PRICE and COST
The price of a home is the dollar amount you and the seller agree to at the time of purchase. The cost of a home is the monthly expense you pay for your mortgage payment.
To accurately compare costs in different time periods, we must look at home prices, mortgage rates, and wages during each period. Home prices were less expensive years ago, but paychecks were also smaller and mortgage rates were much higher (the average mortgage interest rate in 1988 was 10.34%).
The best way to measure the COST of a home is to determine what percentage of income is necessary to buy a home at the time. That would take into account the price of the home, the mortgage interest rate and wages at the time.
Zillow just released research that examined home costs using this formula. The research compares the historic percentage of income necessary to afford a mortgage to the percentage needed today. It also revealed the cost if mortgage rates continue to rise as experts are predicting. Here is a graph of their findings*:
Rates would need to jump to 7% in order for the percentage of necessary income to be greater than historic norms.
Whether you are a homeowner considering selling your current house and moving up to the home of your dreams, or a first-time buyer trying to purchase your first home, it’s a great time to move forward.
*Assumptions in the Zillow report: Buyer puts 20% down, takes out a conforming, 30-year fixed-rate mortgage at rates prevailing at the time, earns the median household income, and is buying a median-valued home.
The number of building permits issued for single-family homes is the best indicator of how many newly built homes will rise over the next few months. According to the latest U.S. Census Bureau and U.S. Department of Housing & Urban Development Residential Sales Report, the number of these permits were up 7.4% over last year.
How will this impact buyers?
More inventory means more options. Lawrence Yun, NAR’s Chief Economist, explained this is good news for the housing market – especially for those looking to buy:
“This rise in single-family housing construction will help tame home price growth, and the increase in multifamily units should continue to help slow rent growth.”
How will this impact sellers?
More inventory means more competition. Today, because of the tremendous lack of inventory, a seller can expect:
A great price on their home as buyers outbid each other for it
A quick sale as buyers have so little to choose from
Fewer hassles as buyers don’t want to “rock the boat” on the deal
With an increase in competition, the seller may not enjoy these same benefits. As ChiefEconomist Nela Richardson, added:
“Because existing home inventory has been so low for so long, new construction is taking a larger share of the market…Builders meet the buyers and see the demand firsthand.”
If you are considering selling your house, you’ll want to beat this new competition to market to ensure you get the most attention for your listing and the best price.
According to the National Association of Realtors’ latest Realtors Confidence Index, 61% of first-time homebuyers purchased their homes with down payments below 6% from October 2016 through November 2017.
Many potential homebuyers believe that a 20% down payment is necessary to buy a home and have disqualified themselves without even trying. The median down payment for all buyers in 2017 was just 10% and that percentage drops to 6% for first-time buyers.
Zillow Senior Economist Aaron Terrazas’ recent comments shed light on why buyer demand has remained strong,
“Looking into 2018, rent is expected to continue gaining. More widespread rent growth could mean home buying demands stay high, as renters who can afford it move away from the unpredictability of rising rents toward the relative stability of a monthly mortgage payment instead.”
It’s no surprise that with rents rising, more and more first-time buyers are taking advantage of low-down-payment mortgage options to secure their monthly housing costs and finally attain their dream homes.
If you are one of the many first-time buyers who is not sure if you would qualify for a low-down payment mortgage, consult a local real estate professional who can set you on your path to homeownership!
The National Association of Realtors (NAR) released their latest Quarterly Metro Home Price Report last week. The report revealed that severely lacking inventory across the country drained sales growth and kept home prices rising at a steady clip in nearly all metro areas. Home prices rose 5.3% over the last quarter across all metros.
Lawrence Yun, Chief Economist at NAR, discussed the impact of low inventory on buyers in the report:
“Unfortunately, the pace of new listings were unable to replace what was quickly sold. Home shoppers had little to choose from, and many had to outbid others in order to close on a home. The end result was a slowdown in sales from earlier in the year, steadfast price growth and weakening affordability conditions.”
What this means to sellers
Rising prices are a homeowner’s best friend. As reported by the Washington Post in a recent article post:
“The rise in median sales prices has made current homeowners much more willing to sell their home, and that willingness is one of the main drivers behind the inventory that does make it on to the market. While it hasn’t been enough to meet demand, it has made the situation much better, compared with even three or four years ago.”
What this means to buyers
In a market where prices are rising, buyers should take into account the cost of waiting. Obviously, they will pay more for the same house later this year or next year. However, as Construction Dive reported, the amount of cash needed to purchase that home will also increase.
“These factors have created a situation where the market keeps moving the goalposts in terms of the down payment necessary for first-time homebuyers to get into a home.”
If you’re thinking of selling and moving down, waiting might make sense. If you are a first-time buyer or a seller thinking of moving up, waiting probably doesn’t make sense.