Four Things That Could Hurt The Housing Market

/ Percension Wealth Advisors, LLC/

I found myself talking real estate a lot the past few days. With the Spring season heating up for the housing market, the inevitable question becomes:

"Will 2018 be just as hot as last year?"

The latest housing data gives a peak into how home values are trending entering Spring/Summer. Housing logged another strong, yet steady month in January. Prices rose by an average of +0.3% across the 20 major markets. Seattle homes gained +0.7% monthly and are up +12.9% over the past year. Seattle maintains its top spot nationwide, but cities like Las Vegas and San Francisco (up +11% and +10% year-over-year, respectively) have chipped away at that lead.

Here is the full city-by-city look:

This should be an interesting year for real estate. Housing demand remains red-hot, especially among first-time home buyers. I was speaking with friend/Realtor Ryan Halset, who said that competition for homes listed in the $500,000 to $700,000 range are going for more than +$100,000 above listing. That range is so significant because it is roughly where most first-time home buyers fall (at least in Seattle).

Overbidding, waived inspections and guaranteed appraisals remain the norm, but there are four factors I believe could slow housing prices following what I sense will be a Spring boom:

  1. Stock market volatility -- Stocks have not been this choppy since early 2016. Back then stock market losses did not prevent home-seekers from buying. It might not again this time around either, but if market volatility drags on or worsens, it could cause buyers to pause.
  2. Rising interest rates -- Interest rates are much higher today than they were two years ago. Back in early 2016 long-term rates were still falling, as the 10-year Treasury yield was below 2.0%. Today the 10-year yield is creeping up toward 3.0%, which means pricier financing. This may not deter first-time home buyers but should make real estate investors less willing to use debt to leverage property purchases. That would mean reduced overall housing demand, which means flattening or lower prices.
  3. More home seekers left in the dust -- I have no data to back this up, but I have a theory based on conversations I have and comments I overhear. There are a lot of home seekers who say they are waiting for prices to cool off before buying. As risky as that is, it might work IF they are investing the capital they would otherwise use to buy a home. My sense is they are not. So while home prices plow higher their cash is sitting idle in the bank and actually losing value when you account for such housing inflation. If that capital is not keeping pace with inflation, their home buying options narrow.
  4. If the economic cycle turns -- I am not saying the economy will turn this year, but it could. Looping back to #1, if stock prices were to fall that would cause employers to cut their workforce. That would immediately stunt the housing market because those without jobs are not going to buy homes. I do not think this will occur, but cyclically speaking we are inching closer to the point where I would expect unemployment to rise.

I say all this living in the bubble that is Seattle, realizing that housing prices are not surging anywhere else like they are here (sans maybe San Francisco). Nonetheless, it is all relative, as cited in #4 above.

In The Market...

The S&P 500 gained +2.1% this past week. Let's look under the hood:

(price data via stockcharts.com)

Every stock sector was positive, rebounding from consecutive weekly losses. Volatility has really ramped-up though, so give it one more day and the above picture could have looked a lot different. This past week was shortened as the market was closed in observance of Good Friday. I suspect that the market will continue to be choppy and that any rallies could be short-lived.

It was nice to see the bond market rally and record its best week of the year. Long-term interest rates fell, with the 10-year Treasury yield dropping from 2.83% to 2.74%. When the 10-year Treasury rate rose near 3.00% a few weeks ago I said then that I thought interest rates would fall before eventually moving higher. That is precisely what has happened. I think they will fall a bit further before subsequently surging higher and seeing the 10-year yield cross 3.00%. Take a look at the 10-year Treasury bond rate here:

(chart created via stockcharts.com)

A wild quarter comes to a close: Remember that stellar January we saw to start the year? Seems like a distant memory. The S&P 500 snapped its 9-month quarterly winning streak, falling -0.9% in the first quarter. March was the second-straight monthly decline, down -2.5%. Stocks fell in back-to-back months for the first time since Dec. 2015/Jan. 2016.

Moving into the second quarter my message remains the same as last week and the week before. Expect more choppiness. The market needs to hold above a couple key levels and eventually get back to new highs before a meaningful rally will resume.

In Our Portfolios...

In Financial Planning...

As you complete your taxes for 2017, start looking ahead to 2018 and some of the major changes that influence your financial decisions. Your 2018 tax return might not look the same as recent years. Here are some of the notable changes that might affect you a year from now:

  • The standard tax deduction amount will double. This means fewer people will itemize their taxes because the standard deduction ($12,000 if single, $24,000 if married) could exceed the sum of all eligible itemized expenses, such as mortgage interest paid.
  • Only $750,000 of mortgage debt is deductible. This is down from the previous $1 million limit. Any interest paid on up to $750,000 in mortgage debt tied to a primary or secondary residence can be deducted. Any interest paid on debt above that threshold cannot. On the plus side, any pre-existing mortgage debt will not be affected. Only new mortgage debt taken on after April 1st 2018 is subject to the reduced limit.
  • Property tax deductions will be capped at $10,000. Previously, there was no limit on the amount of property tax or state/local income tax deductions you could claim. If you own a nice home or live in a state with high income taxes (cough cough, California...) this will adversely impact you.
  • Charitable donations can be deducted, up to 60% of your adjusted gross income (AGI). This is up from the previous 50% limit. In light of the increased standard deduction though, fewer people will itemize their deductions. This means charities will actually suffer because taxpayers who claim the standard deduction will have less incentive to donate.
  • Unreimbursed medical expenses exceeding 7.5% of AGI can be deducted. This is down from the previous 10% threshold. Let's say your AGI is $100,000 and you have $10,000 in medical expenses. You could deduct the amount that exceeds $7,500 (derived by multiplying $100,000 of AGI x 7.5% threshold). This means $2,500 of your $10,000 medical expenses are deductible. Under the previous 10% cap, none of these expenses would have qualified. (Note: This is for tax years 2017 and 2018 only and is set to go back to 10% in 2019.)

What's New With Us?

We are hosting family this weekend for our daughter's first birthday, which happens to coincide with Easter this year. While celebrating for her I will be watching the Final Four.

Have a happy Easter weekend!

 

Brian E Betz, CFP®
Principal