Home Price Growth Will Slow In 2018

After five consecutive years of solid gains, home price growth in 2018 is likely to calm down measurably and rise by only 2% on a nationwide basis. Some states will actually experience a price decline, while others will still enjoy large gains.

Since 2012, the national median home price has risen by 38% while the constant quality measure of Case-Shiller index has advanced 36%. Over the same time, the median wage rate rose by only 12%. The improving economy, with consistent job gains, has raised housing demand while homebuilders have not adequately produced enough to fully satisfy the rising demand. Housing starts have been under the long-term historic average of 1.5 million a year for over a decade. In 2017, only 1.2 million new homes and apartment units were built, although this marks the best performance since the housing recession in 2008. Moreover, homeowners are staying put for much longer than usual before deciding to search for their next home. Our latest information from recent home sellers tells us they expect a 10-year tenure before listing the property, compared to the 7-year tenure that was the norm in past years. This mismatch between demand and supply has been the reason for strong home price gains in the past few years.

Market changes are on the way in 2018, however. In terms of positive changes, the tax reform, by putting an additional $2,000 in the purse of average Americans, will boost economic growth and lower the unemployment rate. The extra money can perhaps help some with downpayment savings. Falling unemployment will bump up wage growth. An annual wage gain of 3% is a distinct possibility by the year’s end. The stock market boom partly reflects the tax reform and cuts to the corporate tax rate. The aggregate wealth for the country is at record highs. The estimated total wealth of all households has been rising by $2 trillion each quarter and now stands at a whopping $97 trillion. Some of that may flow into home purchases as people sell off financial assets to buy property or help family youngsters with downpayments.

However, the tax reform also put constraints on home buying. The tax cuts are not free lunch. The debt is projected to rise by another $1.5 trillion over the next 10 years. The large federal debt accumulation, along with the “quantitative easing” monetary policy in the recent decade, did not affect interest rates all that much. The economic backdrop is very different this time around. Rather than the 10% unemployment rate in 2009, it is now a very low 4%. Any further declines in the unemployment rate will mean some inflationary pressure. Also the Federal Reserve is pursuing, in effect, “quantitative un-easing” — trying to take cash out of the market by selling the bonds that it had purchased during the days of printing money with quantitative easing. This will force up long-term bond yields, and consequently, mortgage rates. The projected rising debt from the tax reform will also nudge up interest rates, as there are more borrowers in the market. Higher mortgage rates nearly always subdue home buying. Fortunately, the mortgage rates will not top 5% in 2018. That is higher than the 4% rates of 2017, but certainly not anything alarming from an historic perspective.

There is another hindrance to home buying arising out of the tax reform. There is less incentive to be a homeowner. In the past, the full deductions to both mortgage interest and property tax nudged some into purchasing a home. Now with a much higher standard deduction - $24,000 for a family and $12,000 for individual filers - a significantly fewer number of people will utilize the itemized deductions. That is, mortgage interest deduction is not needed since many families will simply take the standard $24,000 deduction. Whether or not this is a game changer for homeownership remains to be seen. Many no doubt will still purchase homes simply for the pride of ownership and the opportunity for wealth gain. However, how many at the margin will remain renters for a longer period?

For some living in high cost states, such as California and New Jersey, the tax reform is a disaster. The new maximum limits of $750,000 in mortgage and $10,000 in state and local taxes that can be deducted under the new tax law will significantly raise the cost of homeownership from what it had been before. Some homeowners may decide to sell and even move out of the state. Some buyers will scale back on the type of homes they purchase. Overall, the pricey homes in states with high taxes will see more home sellers than home buyers. Prices will buckle down.

Though the year-end review at this time next year will no doubt show the forecast to be off the mark, the initial outlook of home prices for each of the state and the District of Columbia is attempted here.  The forecasts are based on the market momentum of housing shortages and the strength of the job market, along with likely higher mortgage rates and the local tax situation.  The results say that Idaho, Nevada, Utah, and the state of Washington will continue to experience solid price gains in 2018.  This is not the case for Connecticut, Illinois, and the city of Washington, DC. Hover your mouse over individual states in the graphic below to see my home price forecast for 2018, and more details on each state are available here.

404