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The nation’s housing market for 2018 continues to look good, according to two recently released reports. But first-time millennial buyers will continue to struggle with affordability, especially in high-priced areas like Los Angeles, San Francisco, Boston, New York and Washington DC.
Listen to Ralph G. DeFranco, Ph.D, global chief economist, Mortgage Services, Arch Capital Services Inc.: “With interest rates and home prices both on the rise, first-time homebuyers – largely millennials – may want to consider making the jump from renting to owning sooner rather than late.”
DeFranco further said: “Our research shows few signs of a housing bubble because the typical warning signs aren’t present. Overall, the shortage of housing paired with a robust job market should keep the housing market strong and growing, short of an unexpected event and despite the contrary pressures that may be created by the tax bill.”
Arch Mortgage Insurance Co. (Arch MI) recently released its winter 2018 edition of The Housing and Mortgage Market Review® (HaMMRSM), authored by DeFranco. The chart below looks at a 6.2% increase in home prices in 2017 compared with the year before.
The HaMMRSM also makes market predictions to 2020. Among them: Home prices will continue to increase around the country in most markets. Look to annual increases of 2-6%, with most housing markets currently at low risk for a downturn.
Mortgage rates will rise, causing people to move less often. According to the report, “rising rates give existing borrowers with fixed-rate mortgages a financial incentive to stay put.” In addition, “homeowners will have more incentive to seek second liens or home improvement loans rather than move to a new home or refinance.” Makes sense since a new mortgage would likely be a higher rate cutting into the key affordability factor.
Realtor.com also released its “State of the Housing Union,” “which shows the strong U.S. economy and unprecedented housing shortage pressuring potential home buyers striving to attain the American Dream.” Realtor.com’s analysis pointed to the fundamentals. “Strong buyer demand, constrained inventory, and ready-to-buy first timers are the key underlying dynamics driving today’s housing market. The macro-factors that have defined real estate in recent years – strong demand and weak supply – continue to set the tone for the industry,” said Joe Kirchner, senior economist for realtor.com.
Boston, a city millennials love continues to have inventory and affordability issues. According to Zillow, the median price for homes currently listed in Boston is $735,000.
“I pay attention to numbers and we don’t have enough good property on the market. There is big demand in Boston with companies moving to here either from outside of the city or from other states,” observes David Bates, broker associate at William Ravis Real Estate
“I would be surprised to see a slowdown. I see increasing demand and very good appreciation,” adds Bates who is also known for writing about the Greater Boston real estate market for Banker and Tradesman, Boston Magazine, The Boston Globe, Boston Herald and Boston.Curbed.com.
Clearly, getting your foot in the proverbial front door of your first house remains the key to achieving the American dream.
If the ongoing congressional budget standoff forces a government shutdown, homebuyers and sellers could be subject to more headaches than usual before their deals close.
That’s because buyers looking for mortgage approval could hit paperwork roadblocks if the shutdown furloughs workers at the IRS or Social Security Administration. This is what happened in October 2013, the last time budget gridlock forced a 16-day shutdown that sent millions of government workers on furlough and gummed up the works of the U.S. housing market.
Here’s how another shutdown could make buying or selling a home even more stressful.
Doesn’t the bank decide whether I get a loan? Why does the government have to get involved?
While lenders use government guidelines for mortgage approvals, the decision ultimately belongs to the lenders. That’s not the problem.
As anyone who has applied for a mortgage learns the hard way, the application includes a big stack of paper documenting your financial status, including records like tax returns.
In most cases, lenders want to verify all that paperwork, especially after the housing crash a decade ago when lenders went light on documentation, an approach that ended badly.
If the government does shut down, that includes workers at the IRS who are usually asked to verify the tax returns aspiring homebuyers submit to their mortgage lenders. (If you hear there’s a problem with IRS Form 4056-T, you may have hit that particular roadblock.)
If the government shuts down, does the IRS stop completely?
Some IRS workers would be exempt from furlough, including those who provide essential services like making sure records are maintained and the computers keep recording tax payments.
But verifying information and processing mortgage paperwork isn’t considered “essential.” So those employees would have to stop working.
There’s no working from home either. When the government shuts down, employees are not only barred from the buildings they work in, they’re kicked off the network they access at their job.
What else can go wrong with my mortgage application?
Borrowers who are applying for an FHA or VA mortgage could run into delay if workers from those departments are sent home, and there’s no one available to process the loan.
A loan could also be delayed if a lender tries to verify a Social Security number. That’s often required if something in an application doesn’t match the information associated with a Social Security number in a credit report or other database, even if it’s just a typo. If the lender tries to verify the number with the Social Security Administration, and no one at the agency answers the phone, that borrower could be out of luck.
What if I can’t get approved in time for my closing date?
It’s possible the deal could fall through, but it’s much more likely the contract will just be extended. The last time the government shut down, some 17 percent of closings were delayed, according to a survey by the National Association of Realtors.
A handful of transactions were scuttled, and a few sellers reported that they lost bids because of the shutdown. Some 3 percent said they got a weaker offer, likely because of the uncertainty buyers faced over the length of the furloughs.
Homeowners looking to sell should consider 2018 an opportunity to cash in.
If you haven’t given much thought to selling your home this year, you might want to think again.
Real estate information company Trulia commissioned a survey of more than 2,000 U.S. adults, conducted by Harris Poll, to get a feel for expectations and plans for housing and homeownership in 2018. The survey results show 31 percent of respondents expect 2018 to be a better year for selling a home than 2017 – and just 14 percent expect it to be worse.
Despite the enthusiasm, only 6 percent of homeowners surveyed plan to sell their home in 2018.
Real estate information company Zillow echoes these sentiments in its predictions for 2018, expecting inventory shortages to continue to drive the housing market. With too few homes on the market to meet buyer demand, prices increase and would-be buyers can’t afford the price or down payment needed to submit a winning offer.
If you’re a homeowner and have been thinking about selling, what are you waiting for? You may not consider 2018 to be your year to sell, but here are four reasons why selling in the next 12 months could be more beneficial than you think.
Couple starting painting project in living room.
6 Risky Moves Homeowners Make When Selling
Buyers are chomping at the bit. Eager homebuyers have been frustrated over the last few years, experiencing low inventory in most major markets, which is pushing them to start home shopping earlier in the year to try to beat out the competition and ensure they’re not missing out on any available properties.
Even before the clock struck midnight on New Year’s, people were already getting a head start on looking at buying or selling a home in 2018. Real estate information company HomeLight saw a 25 percent traffic spike on its website on Dec. 26, with continued high rates of traffic through the first part of the new year.
“Folks have generally turned their attention away from the holiday and time with family and friends, and moved onto the new year and what they want to accomplish,” says Sumant Sridharan, chief operating officer of HomeLight. “And for many people, that tends to be where they want to live.”
The best time to sell your home is traditionally between March and June, Sridharan notes, while warmer climates may see a longer time frame because they’re not restricted by weather. But cold weather isn’t keeping interested buyers from starting their home search at the start of the year. The fact that buyers take the day after a major holiday to start looking for new home means the traditional selling season could be even hotter.
And while the last couple years have proven beneficial for sellers, seeing many homes sell for asking price or above, it won’t last forever. Zillow predicts home builders will begin looking to construct more entry-level homes to meet demand later this year. If you wait too long to put your home on the market, you may find yourself competing with new builds that haven’t been a part of the market in large numbers since before the recession.
Interest rates are low … for now. For both the buyer of your home and your own next home purchase, low interest rates can help make a transaction possible. In the second week of January, the average interest rate for a 30-year fixed-rate mortgage was 4.17 percent, according to NerdWallet. Mortgage rate averages reached more than 4.4 percent in 2017, but closed the year out just below the current rate.
While mortgage rates aren’t expected to spike significantly this year, they are forecast to increase overall. The Mortgage Bankers Association predicts 30-year fixed-rate mortgages will rise to 4.6 percent this year, and it expects rates to rise to 5 percent in 2019 and 5.3 percent in 2020.
While increasing interest rates are a sign of a good economy, they can squeeze out some potential homebuyers from the market. The current low rates can serve as a catalyst for many potential homebuyers to get moving sooner rather than later. But as interest rates continue to rise, you’re less likely to see as many bidding wars – which is welcome news for buyers but not sellers.
How the New Tax Law Will Affect Homeowners
Could the changes to mortgage interest rate and property tax deductions make you want to sell your home?
You can move to find cheaper property taxes. The passing of the Tax Cuts and Jobs Act at the end of 2017 means a few significant home-related tax policy changes for the 2018 calendar year: Mortgage interest rates are only deductible up to $750,000 in debt and property taxes are only deductible up to $10,000.
While these limits don’t affect all homeowners, people who live in counties and cities with high property taxes are likely to feel the financial hit when they file taxes in 2019. If your household is going to struggle without the deductions you’ve had previously, it might be time to look elsewhere.
“For most of the world, I think it really creates a consideration of where I want to be and how I want to be there,” says Cody Vichinsky, co-founder of Bespoke Real Estate, based in Water Mill, New York.
Vichinsky expects housing markets in coastal states to be most impacted by the tax reform – and more specifically in the counties or towns with high-ranked school districts because their property taxes tend to be higher. While homeowners with school-age children may see the education factor weigh heavier than the financial burden, “You’re going to see an exodus out of these neighborhoods for people who don’t need to be there anymore,” he says.
You certainly shouldn’t have a hurried reaction to a policy change with an asset as large as a house, but also keep in mind that if you’re looking for the maximum price on your home, the longer the new tax law sinks in, the more likely it is to change feelings toward pricier neighborhoods in coastal markets.
“We do expect, potentially, in the longer term there may be lower demand at the higher price points because the tax [incentives] just aren’t there,” Sridharan says.
Renovations today won’t come back in full next year. Zillow’s 2018 predictions include the expectation that most homeowners will focus on renovations and updates this year rather than selling. If you’ve got remodeling on your schedule for the year, be sure it’s an update for you because it’s unlikely that renovations will have a 100 percent return when it comes time to sell.
“You’re going to get one shot at this,” Sridharan says. “Ultimately the additional money you’re going to spend to make your home look amazing is going to be far less than the amount of money [a buyer will pay].”
The key to taking advantage of the seller’s market this year is not taking the tight inventory for granted. Buyers will still expect effort from sellers in preparing a property for sale. While they may be willing to overlook a dated kitchen, it’s the clutter, deferred maintenance and lack of curb appeal that can still kill a deal. If you do decide put your house on the market, take the process seriously, and you’re likely to see ample interest.
Home prices in much of the country are now higher than at the height of the housing bubble. Yet today there is no bubble. Housing is on a solid foundation. In the bubble, prices became disconnected from household incomes. But in most places today, the typical family has the income needed to purchase the typically priced home at current mortgage rates. And generally it makes financial sense to own your home instead of renting it.
Despite the raging bull market in stocks, housing has been an even better investment for most of us. Almost two-thirds of us own our homes, but no more than half own any stocks whatsoever, and only about one-fourth have stock holdings of any consequence. Homeownership is key to the financial well-being of the middle class, while stocks matter most to the wealthy.
Moreover, because the typical homeowner has a mortgage, the return on the stake in their home is magnified. A D.C. homeowner, for example, typically has a mortgage that is about half the value of their home — the other half being their equity. The return on their investment over the past six years is thus an astounding 100 percent, equal to the 50 percent price gain on the equity. Even the booming stock market hasn’t enjoyed these kind of gains.
Not that leveraging up is a good idea. The obvious lesson of the foreclosure crisis was that too big a mortgage is lethal to remaining a homeowner. But these days homeowners remain cautious borrowers and are steadily building equity in their homes.
It would take a lot to derail the financial fortunes of homeowners. However, in some communities the recent changes to the tax code could do it. Owning a home is hurt by the tax law changes that reduce the value of the mortgage interest deduction, or MID, and the property tax deduction. The qualifying loan amount for the MID is now capped at $750,000, and the property tax deduction at $10,000. The value of both deductions is reduced by the doubling of the standard deduction, thus significantly reducing the number of households that itemize on their tax returns to take advantage of the deductions.
Current house prices reflect current tax breaks. That’s because home buyers generally purchase as much home as they can afford, after considering taxes. If those tax breaks are scaled back, as they are in the new tax law, then house prices will suffer.
The MID is not a particularly effective way of increasing homeownership, as proponents of the tax break often argue. However, adjusting to the scaled-back MID will be financially painful for many homeowners who bought based in part on it.
The tax legislation will also hit housing via higher mortgage rates. The big tax cuts to corporations and taxpayers, financed by government borrowing more from global investors, will temporarily pump up growth. The problem is that the economy may overheat, given that the near 4 percent unemployment rate signals an economy arguably already operating flat-out. Inflation has not been an issue. But it could be, unless the Federal Reserve raises rates more aggressively to cool things off. Global investors will also demand higher interest rates to invest in the hundreds of billions of dollars in debt that must be raised each year to finance the tax cuts.
Considering all of this, national house prices will take an estimated hit of nearly 4 percent due to the tax legislation. Specifically, at the peak of the drag from the tax legislation on house prices 18 to 24 months from now, prices will be 4 percent lower than they would have been if there was no tax legislation.
The impact on house prices will be much greater for higher-priced homes, especially in parts of the country where incomes are higher and there were a significant number of itemizers, and where homeowners have big mortgages and property tax bills. Housing markets in the Northeast Corridor, South Florida, big Midwestern cities, and the West Coast will suffer the most. The hit to house prices in the broad D.C. area will range from 2 percent in Prince William County to almost 4 percent in the District and 5 percent in Arlington.
The new tax law also complicates things for Fannie Mae and Freddie Mac, the mortgage behemoths that are the nation’s largest source of mortgage loans. In case you forgot, Fannie and Freddie failed during the crisis; they required the federal government to take control and pay out hundreds of billions to keep them running. While Fannie and Freddie are making money now, taxpayers are still on the hook for these institutions.
This will be clear in the spring when the large corporate tax cuts and arcane accounting rules combine to force Fannie and Freddie to report a big loss. Taxpayers will once again need to shell out billions of dollars to fill the financial hole. This won’t have a meaningful impact on Fannie and Freddie’s ability to make mortgage loans, but it highlights that taxpayers are taking big risks — risks that will become much larger in the next economic downturn when homeowners struggle to make their mortgage payments. That doesn’t seem likely this year or even next, but a recession will eventually come, and when it does, taxpayers could be writing big checks again. The Trump administration and Congress must figure out what to do with Fannie and Freddie before this happens.
The cut in corporate tax rates also creates an opportunity for Fannie and Freddie to reduce the mortgage rate for borrowers. That rate is based on a fee that Fannie and Freddie charge for the risk they take. The fee is set by their regulator, the Federal Housing Finance Agency, based on the returns that private institutions and investors would get if they made the loan. The lower tax rate means they can now charge a lower fee and continue to get the same after-tax return. The reduction in mortgage rates would be modest in the grand scheme of things, but meaningful, particularly for first-time home buyers for whom even the smallest change in mortgage rates can make the difference between becoming a homeowner or not.
Homeownership is still flagging. It peaked more than a decade ago, and for lower-income and minority groups, it is as low as it has been in more than a generation. Creditworthy borrowers are still having a tough time getting a mortgage loan, although this is slowly getting better. Fannie and Freddie are working hard at extending loans to borrowers who can only muster a small down payment.
However, this effort will only go so far, since it’s hard for low-income renters to save for a down payment. Given the lack of affordable rental housing in much of the country, rents have jumped. The shortage is evident in vacancy rates, which are at 30-year lows, and set to fall further given the dearth of new construction.
Consider that no more than 1.2 million new housing units were put up last year, which is double the amount of construction at the low point during the crisis, but nowhere close to the 1.7 million units needed in a typical year to house the nation’s growing population. This gap isn’t likely to close anytime soon given the lack of available construction workers and tight land-use restrictions in many communities.
Rent increases will thus be an increasingly serious financial burden, especially for lower-income households in urban centers like D.C.
Housing has come a long way in recent years, but it is far from being the bedrock of financial strength that it once was, and it likely won’t be anytime soon. Low-income renters are struggling to hold on as their rents quickly rise, first-time home buyers still find it difficult to find a mortgage loan, and many homeowners must now deal with fallout from the new tax code. Housing’s prospects aren’t bad, but they are disappointing.
Mark Zandi is the chief economist at Moody’s Analytics.
You’ve found a great house. It has every feature you want, and it’s in a great neighborhood. The only issue is the inspector found damage to the roof.
Should you buy this home anyway? What if the home isn’t quite the house of your dreams and has damage on the roof?
There are several issues here, actually. First, roof damage can be very expensive to repair. It can cost as much as to $30,000, depending on the nature of the damage and the size of the roof.
The cost also depends on the type of damage. A few missing shingles from a storm is a relatively minor repair, though it’s visible. But a poorly maintained roof can result in dry rot and structural damage to the home. If rain or moisture has seeped in through the roof, you can be looking at thousands of dollars and months of construction work.
Second, if you’re purchasing the home with a mortgage, the lender may need to get involved. For a large repair or replacement that can affect the home’s structure, many lenders will make repair a precondition of final loan approval. Many home insurance companies also will not write a policy for a building with a damaged roof. Effectively, if the lender or insurance company won’t move forward, you may not be able to move forward.
You may be able to negotiate with the seller about roof damage. Most sellers realize that buyers can be very hesitant to purchase a home with major damage – and roof damage is major damage, especially during the winter. Savvy sellers should realize that roof damage can kill a sale. Be prepared to walk away if the seller won’t negotiate. It’s reasonable to expect the seller to make a major repair before a sale.
As a result, you may be able to negotiate with the seller. Ask him to pay for repairing the roof. He can either do this outright, before the sale goes through, or by lowering the price of the property to match the estimated cost of repairing the roof. If you elect the latter method, be sure to factor in construction cost overruns, as they happen frequently.
Let’s look at the pros and cons of buying a home with roof damage.
1. You have a house. If you really love the house and neighborhood, it can be worth it to you to buy a property with roof damage, especially if you can negotiate the price. One way or the other, you have the house. Be sure, though, that you aren’t blind to potential structural damage because of your desire to have the house. If you’re using the seller’s inspector, it may be worth it to get a second opinion from your own inspector.
2. You’ll have a new roof. Roofs have a varying lifespan depending on the material they’re made of, so if you’re planning on making this house your forever home, choosing the material will be in your best interest. According to roofing contractor Huber and Associates, which operates throughout the South, one of the best bets for a long-lasting roof is copper, which can last for 50 to 100 years, depending on maintenance. Other options include asphalt, slate, metal and wood shingles, among many additional varieties. If you can negotiate so the seller pays the cost to replace the roof, or lowers the home price by the estimated cost, you can end up with a good deal.
3. It can be advantageous in a rising housing market. Part of the equation needs to be the expected real estate market conditions in your area. Do some research about housing price trends. If the real estate market is strong and expected to continue to be so, a house with a new roof can be a good deal for you, as you will gain home equity in a rising market.
1. You may pay more for maintenance. A seller who has allowed roof damage to a home may be careless with other household maintenance chores. Roofs should be inspected every six months for damage. Repairs should be done immediately, because of the danger of structural damage due to leaks. An owner who hasn’t done this may be careless. Again, have the home inspected thoroughly before you purchase so you have a clear sense of any repairs or maintenance needed.
2. Major construction can cost more than anticipated. All major construction jobs tend to make more time and be more expensive than originally quoted. If you negotiate the house price down to accommodate the price of roof repair and then move in, you may end up paying more than you negotiated.
3. The seller may not negotiate. The seller may insist on selling the home as is. This is rare, but it may occur if the seller needs the money from the house or if the housing market is highly competitive. In a hot market, the seller may assume that someone will purchase the house without negotiating the price for repair of the roof, even if you don’t. As a result, you may lose the house if you negotiate. Be prepared.
The decision to purchase a house with existing roof damage depends on the home, the type of damage and the housing market. Weigh your options carefully, and consider the pros and cons.
According to Zillow, the total value of all homes in the United States in early January 2018 is now $31.8 trillion after gaining $2 trillion in 2017.
The cumulative value of the U.S. housing market grew at its fastest annual pace – 6.5 percent – in four years. The value of all U.S. homes rose 8 percent annually in the early stages of the housing recovery in 2013.
- Total U.S. housing market gained $2 trillion in value in 2017.
- The value of all U.S. homes grew 6.5 percent in 2017, the fastest pace in four years.
- Los Angeles, New York and San Francisco are the most valuable housing markets, each worth more than $1 trillion.
For many households, a home is the single largest source of wealth, but the collapse of the housing market and the ensuing Great Recession demonstrated the importance of housing to the U.S. economy as well. The housing market has gained $9 trillion since the lowest levels of the recession.
The value gained in 2017 alone is equivalent to more than the valuation of two companies the size of Apple. Over the past year, the U.S. housing market has gained $1.95 trillion, while Apple recently hit a market value of $900 billion, the first U.S. company to do so.
The Los Angeles and New York markets each account for more than 8 percent of the value of all U.S. housing, and are worth $2.7 trillion and $2.6 trillion, respectively. San Francisco is the only other housing market worth more than $1 trillion.
Among the 35 largest U.S. markets, Columbus grew the most in 2017, gaining 15.1 percent. San Jose, Dallas, Seattle, Tampa, Las Vegas and Charlotte, N.C. also grew by 10 percent or more over the past year.
This was a record year for home values as the national housing stock reached record heights in 2017,” said Zillow® Senior Economist Aaron Terrazas. “Strong demand from buyers and the ongoing inventory shortage keep pushing values higher, especially in some of the nation’s booming coastal markets. Renters spent more than ever on rent this year, but the amount they spent grew at the slowest pace in recent years as more renters transitioned into homeownership and new rental supply slowed rent growth across the country. Despite recent changes to federal tax laws that have historically made homeownership financially attractive, the long-term dynamics pushing up home values and rents are unlikely to change significantly in 2018.”
Renters spent a record $485.6 billion in 2017, an increase of $4.9 billion from 2016. Renters in New York and Los Angeles spent the most on rent over the past year. These markets are also home to the largest number of renter households.
San Francisco rents are so high that renters collectively paid $616 million more in rent than Chicago renters did, despite there being 467,000 fewer renters in San Francisco than in Chicago.
Las Vegas, Minneapolis and Charlotte, N.C. had the largest gains in the total amount of rent paid, with each increasing by more than 7 percent since 2016.