As we begin the New Year, Hilton & Hyland cannot help but imagine what developments the year may bring to the unpredictable world of real estate. On the heels of our most successful year yet, we thought we would share a realistic forecast of the year ahead. Here’s a hint: Los Angeles remains in the Top 10 Markets to watch whereas San Francisco and Manhattan took steep drops.
The Tax Reform Plan & How it Can Affect the Housing Industry
Many recommended cuts and changes bear close watch by the real estate industry. The House GOP is looking to make a few major changes that could leave a dent in home prices. First, it lowers the value of the mortgage interest deduction. Today, taxpayers can deduct interest on home loans worth up to $1 million. The plan would drop the cap to $500,000 for future home sales, limiting its value for luxury real estate buyers. The bill would also weaken the mortgage interest deduction by doubling the standard deduction that all Americans can take to $24,000 for couples, resulting in fewer taxpayers itemizing, which will ultimately reduce the tax advantages of home ownership. Lastly, it limits the amount of property taxes that families can deduct at $10,000. This, too, mostly affects the wealthy segment and is sure to be felt in the suburbs of Southern California.
On the other hand, the mortgage interest deduction allows Americans who can already afford a down payment to buy even bigger houses and therefore, strongly benefits the wealthy. Consequently, these overnight changes are likely to lower real estate prices across the country which is beneficial for millennial buyers, but not current homeowners.
Economic Cycle: A Smooth Glide or a Nose Dive?
According to the Urban Land Institute, many in the industry point to signs, such as the very low unemployment rate, a policy shift toward tightening at the Fed, and high asset prices in real estate, as positive indications that investors are getting more conservative as the cycle stretches out. By achieving more balance, the market may have found the “new norm” of slow and steady growth.
Millennial Buyers Join the Market
While 2018 won’t be particularly easy for the demographic, there are some brighter days ahead for these millions of Americans. In fact, millennials appear to be finding more success at taking out mortgages on varying prices and not solely starter homes. Not to mention, as the largest generation in US history reaches their 20s and 30s when they’re preparing to settle down, they’re more motivated to buy than ever and have the potential to comprise 43% of home buyers taking out a mortgage by the end of the year. Up 3% from the previous years could translate into hundreds of thousands of new homes. Financial advisers suggest striking while the iron is hot because mortgage rates are expected to reach 5% by the end of 2018 as a result of inflationary pressure, strong economic growth, and monetary policy normalization.