New Tax Law Changes and Housing

Existing single-family home sales increased by around 1% in 2017 compared to the year earlier.  Housing inventory that was for sale kept the market from gaining more traction.  New home construction is rising, but the levels we saw before the 2008 crash have not been achieved. 

Many of the factors that have contributed to a lack of accelerating sales remain the same, two factors may result in a suppression of the market.  The first is the changes in the tax code.  Now while the recent tax law will mean that 90% of Americans taxpayers will see more money in their paycheck, the downer to the housing market is the increase in the standard deduction. 

The standard deduction increases to $12,000 for single files and $24,000 for couples means that fewer homeowners will realize the benefit from itemizing their interest expense as a deduction on their taxes.  There are also some limitations on interest deductions which will exclude mortgages of over $750,000, if the mortgage was taken out after December 15, 2017.  There are also some limitations with some deductibility of home equity interest.  The increase in the standard deduction means at current interest rates and with no other deductions, the mortgage threshold has grown from around $200,000 to above $400,000.  This is above the median home price in many areas.  The average median priced home in the U.S. was at $248,100 in December 2017.  The median new home price ended the year at $331,400.  The change in the tax code, while great for putting more money in people’s pockets, may provide a slight disincentive to purchasing a house.

The next factor is the strong economy.  As I write today, the Dow is down over 665 points.  The catalyst for the drop is the growing concern that the economy is heating up and the Federal Reserve may step in to increase rates.  The projection from the Atlanta Federal Reserve for GDP growth in the first quarter of 2018 is a high 5.4%.  This news was coupled with the increase in hiring and wage growth that was the strongest since 2009. 

If interest rates do increase, this will make home mortgages less affordable as interest rates climb, thus making payments higher.  Last year, sales of new homes rose 14.1% from 2016.  Many of these homes that have yet to start construction continue to rise, reaching 32.6% of new home sales in December.  The construction backlog may benefit rental markets in the short term as people who are purchasing new homes must stay in apartments longer, waiting for the home to be completed.

First time home buyer demand will probably be more muted with these factors.  In December 2017, Marcus & Millichap reported that first time buyers accounted for 32% of all purchases.  This rate has bounced from the high 20% to low 30% range since 2010 and will likely stay there in 2018.  This is well below the 41% long term average.

These factors should benefit apartments and other housing rental demand.  In 2018 new apartment completions will ease from the 380,000 units delivered in 2017 to 335,000 apartments.  Half of all additions are concentrated in a limited number of markets and vacancy will remain tight in much of the country throughout the year. 

These factors should all combine to increase the demand for rental housing.  In commercial lending we should understand the current drivers of the demand for these loans and this should continue to be strong all throughout this year.  We also should be aware that the cost of money is rising and increase our interest rates accordingly.