The housing market is ending 2017 with a bang. And in the new year, the market will likely cool down, especially on the high-end, mainly because of tax reform.
Standard & Poor’s said Tuesday that its S&P CoreLogic Case-Shiller national home price index climbed 6.2% in October — 6% above its 2006 peak. Meanwhile, in November pending home sales were up annually for the first time since June and sales of existing homes reached its strongest pace since December 2006, according to the National Association of Realtors.
“2018 home sales will roughly be similar to what we see in 2017,” said Lawrence Yun, NAR’s chief economist, predicting that this year will end with about 5.54 million existing home sales, up 1.7% from 2016. Next year, Yun anticipates essentially no change, a decline of 0.4%, in existing sales.
“Home price gains will be softer with national median price increases of 1%-3%,” said Yun, predicting that median home price this year will increase by about 6%.
Home prices climbed throughout 2017 due to low unemployment, wage growth and historically low inventory. In November, the months-supply of homes for sale on the market plummeted to 3.4 months — the lowest since NAR started tracking inventory in 1999.
“Single family housing starts has a long road back,” said Robert Dietz, chief economist for the National Association of Home Builders.
In 2018, the NAHB expects a 5% growth rate in single-family housing starts, which is still well below the potential growth rate for the sector. Next year total starts will be under 900,000 homes in contrast to the sustainable rate of production of 1.2 million – 1.3 million of homes, based on population growth and the need to replace older housing.
”We will continue to under build,” said Dietz, adding that a shortage of skilled construction workers, rising lumber costs and land constraints are making it difficult for builders to keep up with demand.
New year to bring a much-needed inventory boost
Residential construction is expected to pick up in 2018 because of a provision in the new tax plan that provides pass-through entities a 20% deduction on taxable income, according to industry experts. Most homebuilders tend to be limited liability companies and S corporations. These pass-through entities don’t pay corporate taxes, instead owners of these entities report pass-through income on their individual tax returns and then pay taxes on it. Under the new tax plan, owners of pass-through entities can deduct 20% of their pass-through income.
For real estate companies that are not pass-through entities, the corporate tax rate cut to 21% from 35% will also help. Some believe that the cuts will compel builders to hire, increase wages and make investments.
“We will see a boost in the production of single-family homes for sale,” said Fannie Mae Chief Economist Douglas Duncan. “A reduction in taxes will give builders an impetus to produce.”
It helps that builders have maintained a positive outlook. Builder confidence for newly-built single-family homes increased five points to 74 in December on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) — the highest level in more than 18 years.
Shift to smaller, entry-level homes
Builders are expected to focus on creating entry-level homes. Many have already started to shift their businesses to target first-time homebuyers or retirees looking to downsize. Since 2014, the average square foot of a single-family house has been decreasing. In 2016, the average size of a house was 2,637 square feet, according to Census Bureau’s Characteristics of New Single-Family Houses Completed.