Chart Talk {Housing: 09.24.18}

It's been all over the news recently about current softness in the housing market.  Part of the reason for that is the affordability of homes is tough right now.  There are two reasons for that.  The first and most apparent is the nearly 90 basis point rise we've seen in rates in the last year.    Now via Charlie Bilello over at his Twitter account is a tracking of the 30-year mortgage fixed rate going back to 2011.  You can see not only the rapid rise we've seen in mortgage rates in the last year, but also can note that rates are at their highest levels in nearly seven years.  Obviously higher rates makes the carrying costs for a house more expensive.

Mortgage rates are the most obvious burden on housing, but the hidden drag and in many markets what may be the most insidious is the current cap on mortgage interest deductions found in State and Local Taxes Deduction {SALT} put in place this year as part of the new tax bill.  The current law states that you can basically only deduct mortgage interest on amounts up to $750,000.  It also means that you can only deduct up to $10,000 of SALT taxes when you file your 2018 tax return.  In our area and in many high density urban areas in the northern parts of the country east of the Mississippi, most local expenses are funded through property taxes.  Here, I'm including what in many areas can be the town you live in, any local entities that you have a shared tax burden with other communities and county taxes.  The primary means of funding these areas is through sales taxes and through property taxes.  It is very likely that any home in Cook County Illinois with a $500,000 value is approaching that $10,000 limit.  That means every dollar over that amount is an unreimbursed expense coming directly out of the homeowner's pocket.  The effects of this are just now I think beginning to be understood by buyers.  The housing market now, particularly for homes over $1,000,000 is particularly soft.  It is not uncommon now to see mark downs of $50,000-$100,000 on these homes.

Before you tell me you don't feel sorry for the person who has a million dollar home think about the trickle down effect of this.  A home priced at $500,000 when homes in the same area are selling for over a million likely faces a similar mark down when high end homes go begging.  A 5-10% reduction on that $500,000 home likely means a $25-50,000 mark down on that home as well.  As buyers understand the true costs of owning a home, they pull back unless necessity forces a move.  Likely many younger buyers, especially if they already own a piece of property may not now have the equity available to buy.  

So the real estate market will now reset for a bit.  Eventually it will find equilibrium but until that time housing may be in for a rough patch.

PS.  For anybody in the market for a 2nd home the next two years might provide you with a better entry point.  If I was looking I'd research my market and wait for the right pitch.  Just realize your carrying costs on your little piece of paradise are more expensive under the new tax bill as well.

Back Wednesday.