Written By: Richard Koch – Forex Focus
A quick review of the US housing market and the likely impact of the new tax regime on the housing market in 2018
The realty sector in the United States witnessed phenomenal growth in 2017, largely on the back of an increase in the labour market, which saw unemployment sliding to multi-year lows. The rise in demand also led to a surge in input costs and an acceleration in home prices. On the supply side, builders struggled to cope with the growing demand, leading to a severe shortage in inventories.
According to data from the Department of Commerce, building of and permits for single family homes rose to 10-year highs in November, even as the December numbers expected later this month are likely to be in line or moderately lower compared to the previous month. After a decline in investments in residential construction in the middle of last year, construction activity picked up momentum in the last few months, with homebuilders growing increasingly upbeat. A gauge of homebuilders’ confidence was at more than 18-year highs against the backdrop of robust interest from homebuyers, according to the National Association of Home Builders/Wells Fargo.
Outlook for 2018:
Going by the previous year’s stats, the residential market is witnessing growth from buyers of all income groups, with economists predicting inventories to last only a few months into the current year. Presently, existing home sales are near record lows in spite of the sales figures rising to more than 10-year highs in November; while housing starts of single-family homes, the largest contributor to the broader sector, rose by 5.3 percent in November, the highest in a decade, led by an 8.4-percent increase in the South, the region battered by the twin hurricanes in September and October of last year. In addition, permits to build these properties surged to the highest level since August 2007.
According to the new tax laws that are effective from January of this year, the maximum interest deduction on mortgage loans taken after mid-December of last year stands reduced from $1 million to $750,000. In addition, deductions to state and local property taxes remain curbed at $10,000, thereby reducing tax benefits from owning a home, although it may not affect a majority of Americans who generally do not have a mortgage of that size. The larger impact could, however, result in Americans being less inclined to purchase as the decline in interest deductions could potentially take away the incentive of buying a new property.
Economists, at an event organized by the National Association of Home Builders, believe that the new tax law is favourable to businesses and will help in the creation of jobs, thereby pushing demand for single-family homes in 2018. They expect the recent tax reforms to boost gross domestic product (GDP) to 2.6 percent in 2018, with the housing market playing an important role, although there could be transitionary effects in jurisdictions with high tax rates.
Home prices and tax rates vary across the country. While some analysts expect home prices to fall in certain states as property owners consider selling their existing homes and investing in areas that are largely unaffected by the new tax regime, leading to lopsided growth in the housing marketplace in the country, others expect the bill to be amended during the course of this year with minor changes to the existing laws. After all, the housing sector is one of the key drivers of the economy, and any interruption from homebuyers who look to wait it out and understand the effects of the new tax bill before investing would only lead to sluggish growth in the near-term, posing immense risk to the broader economy.
Market dynamics point to higher prices in the coming months as regulatory and other costs have risen close to 30 percent in the last five years. Added to that, the trade dispute between the US and Canada is driving lumber prices higher, with costs already spiralling by more than 20 percent in the last year. However, with demand expected to be boosted by rising employment levels and wage growth, the negative effects are more or less likely to be offset.