New York City Power Broker Louise Phillips Forbes of Halstead Property Makes 2018 National Real Estate Predictions
The Tax Reform – More to be Revealed:
Tax reform and the bold move to remove tax benefits from homeowners and homebuyers will have an impact on our housing market nationally. However, unlike the stock market, where news creates a fairly immediate and volatile response, determining how these changes will actually translate into market leaders like Los Angeles, New York City, and San Francisco, as well as the ripple out effect to smaller markets, will take some time to impact human behavior – most likely the first three quarters.
With regard to real estate, the tax bill is a mixed bag, disproportionately favoring the commercial sector over residential, for which there are few incentives. Essentially, it will eliminate or reduce the tax breaks that encourage home ownership. While this will probably have a minor effect on home prices nationally, it could potentially have a big impact on urban markets that have more expensive homes and high property taxes.
The following three key points outline the bearing on the real estate industry:
- The State and Local Tax (SALT) Deduction for property taxes will be limited to $10k.
- Currently, phased out at $1.1M, the Home Mortgage Interest Deduction is reduced to $750k. (Keep in mind, the national average home price was $259k in 2017.)
- Gain on Sale of Principal Home – Prior to the new bill, the gain was excluded for the first $500k for taxpayers that are married filing jointly and $250k for single filers. This will be unchanged; however, the threshold of ownership time has been modified to 5 years from the previous 2 years.
Ultimately, the thought is that fewer middle-class people will be itemizing deductions because they are increasing the standard deduction and removing some of the other itemized deductions. Meaning, most middle-class people who bought homes thinking that they would get to deduct items like state and local taxes, property taxes, and mortgage interest may not get to take advantage of those benefits anymore. Therefore, the tax reform bill will make it more difficult for people in commuter areas, like NYC, to sell homes and lead to more homeowners challenging their real-estate tax assessments, which may lead to the weakening of local governments’ biggest source of revenue, according to S&P Global ratings. As a result, the bill could give some buyers additional leverage in negotiating and create an elongated sales cycle.
By adjusting the tax environment surrounding major financial assets, real estate being by far the largest, there is bound to be a shift in demand for those assets and a reduction in value. As income available to service debt falls and the after-tax costs of owning a home rise, property values will adjust accordingly. However, I do not feel this is doomsday!
But more to be revealed…
Increased Interest Rates will be a Game Changer:
The recent increase of 25 basis points in the federal fund’s rate – the third increase since January 2017 – may have consequences for some consumers with respect to their mortgage, student loans, car loans, and credit cards, if they carry a balance. I anticipate it being a motivating factor for buyers early in the first quarter, more so than last year, especially since 95% of first-time homebuyers are dependent on financing. Expect them to act quickly and lock-in reasonable long-term loans enabling them to spend a little more to make long-term buys thereby boosting the housing market. Although, don’t expect prices to go down to offset the increase in interest rates. My advice is to buy more today rather than less tomorrow.
Additionally, rents are up in 92 of the 100 largest cities in the U.S., making it less expensive to own a home in 40 states than rent. Meaning, monthly mortgage payments are less than monthly rents even with the recent interest rate increase. I encourage folks to consult with their financial advisor or accountant and consider buying so that their hard-earned dollars can go towards building equity in an asset they own. It is still possible to achieve the American dream of owning a home.
Lastly, the average 30-year fixed-rate mortgage is now about 4.08%, and while that is still rather low, interest rates are expected to increase annually over the next several years and may be around 5% by the end of 2018 due to stronger economic growth, inflationary pressure, and monetary policy normalization. Moreover, with rising interest rates, adjustable-rate mortgages will certainly be heading higher, and those with an ARM will most likely get another increase too. There is no sense in holding on to an adjustable rate; I strongly urge people to consider refinancing for a longer fixed-rate.
Millennials and Baby Boomers will Dominate Again:
These two dominant demographics will power demand for the next decade. Both generations are experiencing life changes that traditionally motivate people to buy or sell a home. These life-defining changes include marriage, having children, retiring, and becoming empty-nesters. As such, the Baby-Boomers will continue to help boost the market with double transactions as both buyers and sellers. Although this trend started in 2017, it has yet to realize its full potential. People 55 and over own 53% of the U.S. owner-occupied houses, inventory that hasn’t been available to the market for years. As homeowners, many Baby-Boomers are looking to sell and downsize to a smaller home, lowering their cost of living to maximize ease of retirement. Being less dependent on financing gives them the advantage to be more successful with closings. My advice to them is liquidated now, but for those with high-end luxury homes, have realistic expectations. Deals at higher price points can take up to 9 mos. or longer to get done, depending on the geographic location.
Millennials, on the other hand, the largest generation in U.S. history, are more likely to finance and thereby might be more susceptible to increased interest rates. However, they are coming into their own and seeing their incomes increase, enabling them to have more savings and more buying power through larger mortgages. That is due to the strong economy and their career development. Millennials are settling down and starting families, and they are motivated to buy. Therefore, they could make up 43% of homebuyers taking out a mortgage by the end of 2018, up from an estimated 40% in 2017. The New York City area has had a healthy participation from Millennial homebuyers seeing an increase from 19% in 2015 to 24% in 2017.
Nationally, Home-buying will see a Surge in the South and Midwest:
Due to escalating rents, which show no signs of slowing down, and inflated home prices in the coastal cities, Millennials, in particular, are drawn to the South and Midwestern markets because they have a lower cost of living coupled with tremendous job growth, especially from corporations that have been relocating to these areas. Dallas, for example, has seen a significant increase in Millennial homebuyers from 21% in 2015 to 31% in 2017. With regard to homes sales growth, I would bet on Southern cities to beat the national average in 2018. Those markets could see 6% growth or more, compared with approximately 3.9% nationally. Likewise, there is solid affordability in 15 of the 19 largest Midwestern markets. I predict that strong local economies, strong household growth, and population growth of Millennials will fuel the appeal of hot markets, so keep your eye on these cities: Columbus, Cincinnati, Austin, San Antonio, Dallas, Nashville, Raleigh, Charlotte, Las Vegas, Little Rock, Grand Rapids, and Colorado Springs.
The Luxury Market is NOT in Decline; it Continues to Re-set:
The ultra-luxury market, especially in urban environments that had a massive construction boom, has been experiencing highly accelerated and unsustainable growth for the past 7 years that lead to inflated asking prices and declining absorption rates. As a result, New York City in particular – a national leader in the housing market – is still experiencing a very efficient re-setting of the high-end luxury sector that began in 2016 resulting in values down 25-40% to more realistic prices, establishing a growth pattern that is more in line historically. Sellers, particular developers, have had to offer severe price cuts and negotiate deals well below their original purchase prices. Moving forward, high-end buyers may still have a bit more room to negotiate early on in 2018 but I expect the price drops to level off during the year. Additionally, this phenomenon has had a trickle-down effect on the average price of a Manhattan apartment. It may dip slightly in 2018 to $2.1M from $2.2M (including new development), but existing home sales will remain more or less the same compared to the approximate 3.9% increase nationally, reflecting the softer luxury market in Manhattan.
Foreign Buyers Expand their Borders Beyond Coastal Cities:
Thankfully, the dollar remains strong. However, while international buyers still look to New York City, Los Angeles, Miami, and San Francisco real estate as a safe haven for their money, escalating price per square foot numbers – an average of $2,100 in Manhattan closings for new development condos in 2017 – and the re-setting of high-end luxury markets, are pushing them to look in other metropolitan areas nationwide. Cities like Nashville, Charlotte, Columbus, Chicago, Dallas, Las Vegas and Austin, are rapidly grabbing foreign buyers because prices are lower and they can get a better return on investment. Their primary interests are long-term growth opportunities, a luxury lifestyle, and security. Moving forward, prime coastal locations will always have an appeal but the trend of international buyers expanding their searches and taking a serious look at new locations will continue to accelerate in 2018.
Consumer Confidence will Boost Home Sales:
GDP increased at an annual rate of 3.3% in the third quarter of 2017, up from 3.1% in the second quarter, fueling consumer confidence. The unemployment rate is at 4.1%, well below the natural rate of unemployment, and wages are slightly higher. Some economists claim the American labor market is stronger than it has been in decades. Furthermore, the record-breaking rise and powerful performance of the stock market post-election has fueled confidence and given people the assurance they need to loosen their purse strings. Young Americans in particular, are increasingly feeling more confident to buy homes. I recommend acting now because the national median home price could increase as much as 5.5% in 2018 (according to NAR) because of the inventory shortage, and the higher mortgage rates will eat into some buyers’ budgets.
Lack of Inventory Spurs Fast-Moving Markets. Buyers should be Prepared:
Year-over-year housing inventory has dropped 10%, and home building has not kept pace with the increase in demand for starter homes and remains below historic norms. And, demand will only continue to grow as buyers become anxious to purchase homes before interest rates climb higher. Supply may increase somewhat in 2018 but we still won’t build enough new homes to meet the demand, which may contribute to higher prices. However, this pent-up demand could motivate more property owners to sell, especially Baby-Boomers, easing some of the inventory crunches. Regardless, in a competitive market, buyers need to have a realistic approach to the process and be prepared to act quickly when they find Home Sweet Home. I encourage them to build their team early on and not lose out on a property because of some unnecessary mistakes that occurred simply because they were not organized. A team should include a real estate broker, a real estate specialized attorney, mortgage lender, appraiser, and inspector (if necessary).
About Louise Phillips Forbes: With career sales exceeding $3 billion, Louise Phillips Forbes is an industry leader in the New York City real estate market. One of Manhattan’s elite Power Brokers, she is a multi-time winner of Halstead Property’s esteemed Broker of the Year award and currently leads the firm’s #1 team. She has achieved a significant following among homebuyers and sellers, skillfully negotiating deals of all ranges. Moreover, Louise is a visionary sought-out by developers throughout her career as both an advisor and an on-site director of sales and marketing. She has partnered with some of New York’s most accomplished developers on more than 30 projects to date and assembled renowned design teams to change the landscape of the city while maintaining the integrity of cherished landmark buildings. Recognized as a highly dependable advocate for her clients, she considers herself more of an “educator” than a salesperson. Louise is quoted frequently in real estate articles for many notable publications and blogs and is consistently named in the Real Trends/Wall Street Journal’s “Real Estate Top 250” list of best brokers and teams nationwide. She also appears on national and regional TV shows across the country to comment on local, domestic, and international real estate issues. Louise is a guest lecturer for the Real Estate Board of New York (REBNY) and has been a panelist for the Asian American Real Estate Association’s East Meets West Luxury Real Estate conference, Real Estate Top 100 Mastermind Summit, and the annual Inman News Conference in New York. Likewise, she is a regular contributor to Halstead Real Estate’s Empowerment Programs and Vince Rocco’s “Good Morning New York”, America’s No. 1 online real estate radio show.