2018 housing off to a confusing start + 5 factors that can make it worse

Welcome to 2018 and Happy New Year!

What a fantastic year we had in housing for 2017 (unless you were a buyer). Interest rates stayed low (then began to rise toward the end), home prices broke records for many major markets (but according to CoreLogic, many are overvalued), and the mortgage industry had a good year in spite of lower refinance activities (however, profit margins are narrowing)…So, it was a good housing year, but not without many caveats. 

Looking ahead to the next twelve months, if achieving more clarity was your new year resolution, you could be out of luck – at least when it comes to housing. Here is a sample of the latest housing forecasts:

New year headlines off to confusing start

If you find it challenging to seek direction out of the latest headlines, you’re not alone. We heard back in December existing-home sales had climbed to an almost 11-year high; a week later we learned that home sales have since flattened. At the same time, there are other signs of concerns, including reports of rising mortgage delinquency and increased credit risks. Put yourself in the shoes of a homebuyer, your confusion on whether housing will be on a steady growth path could feel even more compounded. The truth is: 2017 was an encouraging year for housing, but to quote our basketball friends, it’s not a slam dunk going into 2018, especially with tax reform as the elephant in the room.

Here are the top 5 factors that could affect home prices in 2018:

1. New tax laws

Two key changes will likely affect home prices most in highly taxed and high-priced coastal markets including in California, New York, New Jersey and Connecticut. Homeowners’ mortgage interest deduction limit will decrease from $1,000,000 annually to $750,000 on all new purchase or refinance loans. If they itemize their deductions, they will also have a new cap of $10,000 for combined state, local and real estate tax deductions. California will no doubt be an interesting state to watch as it has consistently led the national real estate rally in the past two years.

2. Migration patterns

Which led us to the second factor that could affect home prices in 2018. The affordability challenge – along with other factors including new tech hubs in emerging markets and wider geographical distribution of well-paying jobs – have driven more Millennials to move away from expensive housing states such as California and New York. In ValueInsured’s latest Modern Homebuyer Survey, 8 out of 10 (81%) of all Millennial homeowners believe more people will relocate to cheaper areas to buy if their local home prices continue to rise.  

3. Demographic trends

Millennials – the largest demographic population in our history – is aging and earning more; that is great news for housing and home prices. At the same time, more Baby Boomers and even Gen-Xers are becoming empty nesters and downsizing, freeing up inventory of larger homes. As more Millennials enter the first-time homebuyer market, some may compete for starter homes with downsizing Boomers, while demand on multigenerational housing stocks will also increase if current trend continues.

4. Inventory

In 2017, shortage of home inventory was a top driver of higher home prices. As average job tenures continue to shorten, and as Americans become more mobile, we should see more homeowners who have been holding onto their properties to finally enter the seller market in 2018. Same is true for empty nesters who have been waiting to downsize but were unwilling or unable to afford it in 2017.

5. Interest rates

Low interest rates were certainly a factor in 2016 and 2017 in fueling buying, as well as refinancing that could have prevented some homeowners who wanted to hold onto low payments from selling. With 3 or 4 interest rate hikes expected for 2018, home price growth could slow as a result.

6. And a bonus…

Above are some of the key rational factors that could affect home price growth in 2018, but don’t discount the power of emotions. Fear – whether it’s a fear of geopolitical tensions, natural disasters, an uncertain market, or of their own job future… – could dampen enthusiasm among potential homebuyers. On the flip side, the emotional desire to own a home could also overcome concerns for interest rate hikes or tax reform repercussions. This is why housing tea leafs will always be hard to read, with or without confusing news headlines.