Real Estate Predictions for 2018
It's that time of year that we all take out our crystal balls and prognosticate about what might happen in the coming year. With tax 'reform' passed and the Federal Reserve leadership about to change, 2018 may shape up to be a pivotal year for real estate. Here are my predictions for the year:
Interest Rates: I predict an increase from the current 4% 30 yr mortgage rates to 4.75% at year end. During 2017, the Federal Reserve raised the Fed Funds rate 3 times, but mortgage rates (and 10 year treasuries) barely budged (flattening the yield curve). But 2018 has already seen some movement in 10 yr treasuries and the Fed anticipates 3 to 4 quarter-point increases in the Fed Funds rate. I believe the flattening of the yield curve is over and the expected increases in short term rates will impact longer-term rates accordingly. I also see potential labor shortages driving up wage inflation (and general inflation), creating greater upward pressure on interest rates.
A three-quarter point increase in rates requires a bit over 7% more income to qualify for a given loan amount. This could suppress demand or reduce the amount of money buyers are bidding over list prices.
Tax Reform Impacts on RE: Many of the worries surrounding caps on mortgage loan interest deductibility and property tax deductibility are unlikely to have immediate impacts on the real estate market. In King County, WA, the percentage of homeowners itemizing their deductions is expected to drop from 90% to 55% (per Zillow) - but this dynamic is unlikely to change the motivations for home ownership here. I predict that home price growth will decline in the $1M to $1.5M range - the range most impacted by the capping of mortgage interest deductiblity at $750,000.
The reduced tax subsidies for home ownership may result in buyers saving more money to put as a down payment on a home (so that they can maximize the tax effect). All other things being equal, this could reduce the demand for homes in the short run - which could impact home price inflation on the margins
Home Inventories: The continued growth in employment in the Puget Sound will continue to drive down inventories. The influx of people from other high cost states will continue to create upward pressure on prices, continuing to frustrate the WA residents who are just trying to buy their first home or move up. I predict that another year of frustration from home buyers will result in more buyers exiting the buying market. The net effect will likely be more of the same in this market - inventories hovering around 1 month and accelerating demand for home in outlying areas where home affordability is higher.
Employment growth is projected to continue at a rapid pace through 2019, so it is possible that inventory normalization will not begin to occur until 2020.
That's all I can see in my crystal ball - time to get to work on helping Realtors with their businesses!
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