With the Trump economy enjoying record levels of employment, manufacturing jobs returning, and interest rates remaining in historically low territory, the housing market should be going strong, right?
So far, the statistics tell a conflicting story.
With the home buying season now getting underway, the signs of a moderating real estate market are already showing themselves. For instance, over the past year or so, the national average of housing price increase is a paltry 0.6 percent. This time last year, annual housing appreciation was up 10 percent. This is the–and perhaps part of the cause–of changing buyer perceptions.
Data from Redfin, which sells houses in 85 markets nationwide, confirms a shift in buyer behavior. In January of this year, only 13 percent of homes on the market had competing offers, down from 53 percent in January of 2018. Buyer sentiment, at least in the early part of 2019, appears to be less optimistic, if not wary of where the market is headed.
What other factors may be driving this decline in buyer enthusiasm?
New Tax Laws
There are several possibilities. For one, the Tax Cuts and Jobs Act, effect from 2018 -2025, is not always having the intended net effect. With the loss of many of itemized deductions, buyers for homes in the $250,000 – $750,000 range may actually end up paying more in property taxes, even with the higher standard deduction.
This fact alone may depress buyer enthusiasm for moving from their first house up to a larger, more expensive one. That’s because those buyers typically have children, with all the associated expenses, including college as well as retirement to pay for. With such expenses, it’s easier for some to put moving into a more expensive house on the back burner.
Adding to those factors, the new tax law also caps mortgage interest deduction for loans only up to $750,000. And, for those married taxpayers who file their taxes separate from their spouse, the debt limit is reduced to $375,000. These deduction reductions may not be as much of a factor in many home buying markets, but in upper-middle-class areas and major coastal markets where home prices – and often activity – tend to be higher, it will have an impact.
Buyers’ Expectations Differ From Sellers’
Perhaps just as importantly, even though wages are rising, home prices are rising faster than wages in 80 percent of U.S. housing markets. That’s a huge factor in how buyers view the market. Not surprisingly, buyers aren’t moving as quickly as they have over the past several years. Plus, with predictions a price drop in real estate just as plentiful as those predicting the opposite, people tend to confirm their own biases.
Thus, many buyers are waiting before they make an offer. Their thinking is borne of the simple rationale expectation of, “why buy today when I can get the house at a lower price in six or eight months?” This reasoning has led to offers coming in slower and lower for homes on the market in 2019.
Housing Shortages and Surpluses
That hesitancy has also impact the new housing market as well. According to the Census Bureau and the Department of Housing and Urban Development, in January of this year, new home sales declined 6.9%. As one might expect, the construction industry is feeling the pinch. Housing starts decreased 8.7 percent to a seasonally adjusted annual rate of 1.162 million units in February of this year.
Sellers Aren’t so Willing to Deal – Yet
Meanwhile, sellers aren’t yet on the same page as buyers. They’re not seeing home prices fall, so why should they lower their asking price with the frenzy of the summer buying season just 60 days away? All things being equal, that way of thinking makes sense today, but will it in July?
But there’s another piece to the housing puzzle: many urban and suburban areas of the country face a housing shortage—at least in the mid-tear market—, including California, Las Vegas, New York, as well as some unexpected places such as Illinois, Michigan, Boise, Idaho and the greater Austin, Texas area. This shortage puts upward prices on housing, pushing affordability out of range for their target market.
On the flip side, many markets are seeing housing surpluses. Inventory is up the majority of the top 50 biggest metro areas of the country, including Los Angeles, Denver, Nashville, Atlanta, Dallas and Boston. It’s a noteworthy irony that half the country can’t afford to buy a house and the other half can’t afford to sell theirs.
What’s the answer?
Lower Interest Rates and Looser Regulations to Spur Market
But the biggest factor in the housing market is the financial one. Interest rates, which are simply the costs of borrowing money, have actually fallen compared to this time last year. Low interest rates are typically viewed as making homes more affordable for buyers, which is true.
Of course, over time, low interest rates may also drive up prices. Today, mortgage rates are at a 14-month low, which should prompt more buying activity. But that’s not all that’s happening.
To add fuel to the low interest rate fire, zero-down loans have come back into the mortgage market. Of course, banks have been loosening credit for the past four years to keep abreast with the credit cycle, so the latest round is part of a longer trend. That said, lowering lending standards usually happens when there aren’t enough qualified buyers to keep the housing market afloat, as the most credit-worthy borrowers have acquired their financing. That doesn’t always end well.
And finally, home lending giants Fannie Mae and Freddie Mac are offering refinancing options for homeowners who lack the equity to refinance their home. This should result in higher activity levels for refinancing, which will be a boon to the mortgage industry.
Despite all these different variables, one thing is for certain: If you’re in the market buying, selling or building, it will be an interesting season.
James Gorrie is a writer based in Texas. He is the author of “The China Crisis.”
Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.