By AnnaMarie Mock, CFP®
The American Dream consists of baseball, warm apple pies, and homeownership. As I near the end of my mid-twenties, many of my peers are trying to realize the American Dream of purchasing their perfect starter home. Over the years, my cohorts have casually been looking to find the deal of the century in a move-in-ready starter home at a low price. But even the starter homes that require major renovations and improvements have come with lofty price tags.
The homeownership rate in the fourth quarter of 2018 increased to 64.8% from 64.2% in the first quarter, according to the US Census Bureau. This rate is pertinent because it reflects the number of younger households that can make the transition to homeownership. The first quarter of 2019 has proven to be a strong rally from the more meager figures in 2017 and first half of 2018.
The homeownership rate in the first quarter of 2019 was highest for households ages 65 years plus at 78.5% and lowest for those households under 35 years of age at 35.4%. However, we are expecting the housing outlook to follow a more positive trajectory that is conducive to homeownership across all ages. The first five months of 2019 has been a sigh of relief as mortgage rates declined, home inventory increased, and price growth of homes slowed which means more favorable conditions for buyers.
Throughout 2018, mortgage rates increased from about 4.00% to 4.94% by the end of the year. In April 2019, the mortgage rate hit a 63-week low at 4.17%, which was the biggest drop in nearly 10 years. The mortgage rates are expected to increase slightly over the coming months, but the projected rates are still below levels that we saw only a few months ago.
The overall inventory of homes grew 1.2% from March 2018 to March 2019. With the increasing of inventory and concurrent falling prices for new homes, previously deterred buyers are bombarded with a slew of new listings and options. Price growth of homes has slowed for 10 consecutive months and dropped to its lowest level in February of 2019. The higher inventory and lower prices are reducing the likelihood of entering into a “bidding war”.
The National Association of Realtors data shows that pending sales climbed 3.8% from February to March 2019, which indicates that there may be a strengthening trend in sales moving forward. According to the National Association of Realtors, about 40% of home sales occur between March and June, so many are optimistic for positive data in the second quarter of 2019.
There is, also, an increasing demand for new construction homes. In February 2019, there was a 6.1 months’ supply of new homes for sale, up from 5.4 only one-year prior in February 2018. In addition, the median length of time a home is on the market is lower in 2019 and this trend can be seen across major cities across the United States.
In general, the housing market is doing very well in the United States. However, even with positive sentiment some regions have been negatively impacted by the Tax Cut and Jobs Act of 2017 (TCJA). The TCJA capped the mortgage interest deduction for new mortgage loans created after December 2017 up to a balance of $750,000. It, also, limited the state and local property tax (SALT) deduction to $10,000. Although home prices on average across the country are trending downward, the repeal of the mortgage and SALT deduction has had an adverse effect on the affordability of homes in some regions that are not adjusting to the national price average. For example, if a person purchases a home and assumes a mortgage loan of $900,000 with $20,000 property taxes, only interest accrued on $750,000 of the $900,000 will be deductible. In addition, only $10,000 of the $20,000 property taxes will be deductible due to the SALT cap.
The number of home closings in the northeast on average increased by about 1.5%, and the Midwest and southern states remained materially unchanged. However, the west coast saw a decrease of 8% in home sales from 2018 to 2019 due to the unaffordability of housing prices. This includes the exuberant purchase price of some homes in tandem with the inability to deduct potentially all of the mortgage interest. These tax laws have made the overall price of buying a house more expensive in areas such as New York City, Silicon Valley, and Seattle.
As people look to downsize or purchase a starter home, it is important to review your finances and ensure that the purchase price and ongoing expenses can be maintained over the long term. Buyers in areas affected by the TCJA, including my peers, should not feel discouraged and should continue to search for their dream home. The American Dream is still alive and thriving! If you have any questions, please feel free to reach out to the HIGHLAND team.