Kristian Rouz – Despite this year’s acceleration in US home sales to their multi-year high, the rising interest rates and sky-high housing prices are poised to curb the demand for homes next year. The Republican tax reform, for its part, has been deemed insufficient to brighten the outlook, as the final compromise bill will have only a modest stimulative effect to the residential real estate market.
According to a report from the National Association of Home Builders (NAHB), sales of single-family homes are poised to rise only 5 percent next year, which is only half of the increase in 2017. It would also be the slowest pace of sales in this sector since 2014.
Real estate experts say the initial version of the GOP tax plan would have provided more benefits to home buyers, and could have possible offset the negative effects of rising borrowing costs to home sales. However, the final tax reform bill allows home buyers to deduct mortgage interest from their taxes if the property costs less than $750,000 – down from $1 million previously.
This is a hit to the bicoastal elites, as most housing in the New York tristate area and in California is priced above the $750,000 mark.
Additionally, homeowners in high-tax Democrat-governed states will pay even higher taxes now, as the tax bill limits deductions for state and local taxes at $10,000.
“In major metropolitan areas where property values are high and taxes tend to be high as well, the middle-class family is going to get hit by that,” Joel Naroff at Naroff Economic Advisors said.
This comes as US new home sales surged 17.5 percent last month, the most rapid increase in 25 years. Homebuyers rushed to banks while mortgages are still fairly affordable. However, this might not have been the best decision in certain local submarkets, as a separate report suggests home prices might significantly decline next year in parts of the country – due to the GOP tax reform.
There are several exceptions to this: New York and California. According to Barclays, eight of the 20 counties with the most expensive residential properties are in California. Other comparable counties are in the Empire State and Connecticut.
"We find that the increase in tax burden during the first 12 months of homeownership driven solely by the mortgage interest and property tax deduction caps varies from $0 for the county with the 20th highest median home price (San Miguel County, Colorado) to approximately $7,200 for the highest-priced county (San Francisco County, California)," Dennis Lee of Barclays wrote.
The analysts say this will stave off the demand for properties in such areas, producing a plunge in property prices. According to Barclays’ estimates, home prices in these areas will have to drop by 0 to 11 percent in order to remain unchanged after-tax mortgage and property tax payments.
Additionally, the NAHB expects a higher demand for cheaper homes next year. Several major homebuilders share a similar sentiment, with such industry heavyweights as Lennar Corp and PulteGroup Inc. planning to ramp up their investment in the so-called “entry-level” home sector.
Mortgage rates are also poised to increase next year, as the Federal Reserve plans at least three interest rate increases in 2018, after raising borrowing costs thrice this year. Currently, the 30-year fixed mortgage rate stands at 4.17 percent, up from 3.50 percent in mid-2016.
However, Fed borrowing costs have increased by 100 basis points over the same period, which suggests a lack of proper policy transmission to the overvalued market.
“Tax changes, price increases, interest rate increases — there’s nothing good on the horizon for the residential housing market,” Naroff said.
Separately, experts from the Mortgage Bank Association say in spite of the rising financing costs, median home price will increase by 4.5 percent next year, up from a 2.8-percent increase in 2017.