The demand and supply of houses available continues to remain unbalanced.
Most markets around the world are experiencing a shortage of houses, which makes current homeowners hesitant on whether they should list their home for sale.
Nobody is going to sell their home if they don’t have somewhere else to go. The lack of housing available has created a huge problem in the housing market, especially for first-time homebuyers and the Millennial generation.
Not only is the shortage of housing available an on-going problem, the new tax bill affects future and current homeowners.
Because of these factors, here’s what we can predict to happen in 2018:
1. Low supply equals a pricey housing market
Across the country, there is a clear shortage of houses available for buyers.
The issue is a contributing factor of the rising prices of homes. As home prices are climbing, the idea of homeownership for first-time homebuyers and Millennials is becoming more distant.
This particular pool of people does not have the advantage of using the profits from the sale of their last home to help finance the down payment or closing costs.
According to reports, about 51 percent of U.S. homes for sale were listed in the top third of the market as of September 2017. Which is very unrealistic and out of reach for first-time homebuyers.
2. Entry-level homes will be built
Over the years, the number of newly constructed homes has remained quite low.
The housing market was more interested increasing profits by renovating older homes.
Now that the housing shortage has reached new lows and a new generation is entering the housing market, builders will focus their attention on building more entry-level homes.
Millennials in particular, are slowly entering the market, which means the demand of houses will only go up.
Experts predict we will see more entry-level homes being built to benefit first-time homebuyers and the Millennial generation.
Construction companies can no longer ignore the high demand of entry-level homes, so they will shift their attention on increasing the supply available.
3. Make room, the Millennials are moving to the suburbs
Stereotypically, the suburbs are known to be for growing families. Families gravitate toward the suburbs for the safety of their children, convenience of local stores, schools and affordable housing.
Compared to the city, suburban living is significantly less expensive.
Since the suburbs offer more affordable living, Millennials will make the move to the suburbs just so they can become a homeowner.
Although it may place them further away from urban jobs, they will sacrifice where they live so they can save some money.
Builders are responding to this by constructing in areas that are in “urban suburbs”.
Urban suburbs have the best of both worlds – they are located in the suburbs, but have that urbanized lifestyle of extreme convenience to public transit, restaurants, retail and amenities.
4. Homeowners will choose remodeling over selling
Because there is a low inventory of houses available, homeowners rather remodel than sell their home.
In such a tight market, current homeowners do not want to be left stranded and have limited options available.
So instead, homeowners will remodel their home to avoid dealing with the lack of supply.
This concern will contribute to the low inventory of housing as well.
5. New residency requirements will keep homeowners from selling
Now that the new tax reform is in motion, it has created major changes in tax deductions for home sellers.
Before the tax bill was signed, single homeowners could exclude up to $250,000 ($500,000 for couples) of the sale proceeds from capital gains when they sell their primary home, as long as they lived there for two of the past five years.
However, the new tax reform extended the number of years to five of the previous eight years in order to deduct gains.
This change will keep current homeowners from selling so they can deduct capital gains.
6. Home prices are expected to increase
The shortage of houses is directly influencing the prices of homes.
According to housing experts, existing home prices are expected to increase by 3.7 percent. In other words, because the prices of homes are continuing to rise, many people are not as eager to buy.
Recent reports have concluded since January through October 2017, the Case-Shiller U.S. National Home Price Index increased by 5.92%, which is the highest we’ve seen since 2013 when the market was recovering.
Experts are predicting this number to climb for both new and existing homes.
Which makes it difficult for first-time homebuyers and the Millennial generation to purchase a home that is within reach.
7. Mortgage payments will increase
Mortgage experts are predicting that interest rates will increase between 4.3 and 4.5 percent.
Why is this?
In late 2017, the Federal Reserve started reducing the size of its $4.5 trillion asset portfolio, which included $1.7 trillion mortgage securities.
Because of this reduction, mortgage rates are expected to gradually increase.
And now that home prices are climbing along with interest rates, mortgage payments will be higher.
As of last year, monthly payments of principal and interest rose by 13 percent. Which allows us to predict interest rates will continue to go up in 2018 as high as 15 to 20 percent.
Before we see these changes, take advantage of these all-time low mortgage rates and get locked in now.
8. Homebuyers will leave high-tax states
Current homebuyers will leave high-tax states like California, New York, New Jersey, Maryland, Massachusetts and Illinois because they can get more home for less money elsewhere.
If state and local tax (SALT) deductions are eliminated, homeowners will consider packing up and moving to a different state where state, local income and property taxes are not deducted.
In a recent migration report, homeowners surveyed said they would consider moving away from expensive coastal cities and move inward toward more practical and affordable cities, like Sacramento, Phoenix, Atlanta and Nashville.
How does the tax reform affect real estate professionals?
The tax reform in particular is affecting all parties in the housing market –
Sellers, buyers, mortgage lenders and real estate professionals.
Because the new tax reform is implementing new requirements and restrictions, real estate professionals need to be conscientious of how it will impact their business.
Here is a quick guide of how it will impact you as a real estate professional:
- Your 20% Business deduction is applied to your taxable income AFTER your applicable expenses
- Your 20% Business deduction applies to all filings under the following:
- Sale proprietorship/Independent contractors/Form SHC C
- Your 20% Business deduction is standard up to:
- $157,500 for single filing. Then will start to phase out until $207,500
- $315,000 for joint filing. Then will start to phaseout until $415,000
- QUICK TIP: Contributing to a Conventional IRA will help reduce your taxable income amount so you can stay within the required income limits
- Your standard deductions have doubled –
- $12,000 for single filing
- $24,000 for joint filing
- Your vehicle deductions for business use have nearly quadrupled
- Meals and Entertainment has been reduced to ONLY MEALS. You can no longer deduct tickets to the game, concerts, shows, etc. to use toward deductions
To give homeowners a better idea of what they can expect in 2018, here is a chart of tax reform scenarios:
AGENT – SINGLE – NO KIDS
Prior Tax Law
New Tax Law
|Business income deduction (20%)||-0-||$11,000|
Tax savings compared with prior law: $3,091
|AGENT – MARRIED – 2 KIDS||PRIOR TAX LAW||NEW TAX LAW|
|Net commission income||$45,000||$45,000|
|Spouse salary income||$45,000||$45,000|
|Business income deduction (20%)||-0-||$9,000|
|Personal exemptions (4 x $4,150)||$16,600||-0-|
|Tax credit for children||$2,000||$4,000|
|Net tax after credits||$5,358||$2,459|
Tax savings compared with prior law: $2,899