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2018 Housing Forecast: Be Prepared and You Will Rock

posted Feb 23, 2018, 1:47 PM by Joyce Evans   [ updated Feb 24, 2018, 7:17 AM by Richard D'Ascoli ]
This year could be your best career year ever in real estate. That’s the message from an economist with the California Association of REALTORS® (C.A.R.). C.A.R.’s Jordan Levine recently delivered a “2018 Housing Market Outlook” presentation to Association members.

“The economy is strong, unemployment is low, home prices are up and demand is still high as people still want to own their home,” said Levine. “We’re seeing demand from a variety of clients, ranging from millennials, babyboomers, and immigrants to foreign investors and even Gen Xers who want a bigger house. There are still many challenges and headwinds, but there’s still no reason why 2018 can’t be the best year ever for REALTORS®. Be prepared and you will rock.”

Levine noted that California’s unemployment rate of 4.1 percent in December was the lowest in more than 40 years. Also in year-over-year comparisons between December 2017 and December 2016, job growth increased 1.4 percent. The growth for specific industries included: Construction, 7.1 percent; Educational Services, 5.3 percent; Leisure/Hospitality, 3.8 percent; Healthcare, 2.8 percent; Management, 2.0 percent. “We’ve seen job creation reflect a good mixture of both high- and low-wage jobs. California is firing on most cylinders,” said Levine.

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President Trump’s tax reform is expected to have its biggest affect on higher-end properties, said Levine. The reform caps mortgage interest deductions for primary and secondary residences at $750,000 (down from $1 million), while capping state and local tax deductions (SALT) at $10,000 (previously, there was no cap). Also, the corporate tax rate was lowered from 35% to 21%. Individual tax rates also are now lower at 0%, 12%, 22%, 24%, 32%, 35% and 37%. The standard deduction was doubled, to $12,000 and $24,000 for individuals and married couples, respectively.  The child tax credit also was doubled $2,000, with up to $1,400 being refundable, which means people could get money back if the credit exceeds what they pay in taxes. “With a much higher standard deduction, there’s less incentive for renters to own,” Levine said.

Regarding housing market trends, Levine said, “A tale of two markets continues to be the theme of California’s housing market with the lower end of the market bearing the brunt of the housing shortage. At the other end of the spectrum where inventory is less constrained, homes priced $1 million and higher are posting solid sales gains, especially in the $1.5 million-to-$2 million range. Also, prices have almost doubled since 2012, but active listings are down, continuing a four-year trend. Still, there’s been lots of action in the starter home market.”

In 2018, Levine said housing availability will remain a challenge. “Supply takes the blame, we’re dealing with a supply and demand mismatch,” he said. “Existing homeowners aren’t moving. We ended 2017 at the lowest level since June 2004. In 2018, shrinking inventory will continue to be a major factor shaping the 2018 housing market.”

Demand is expected to continue because clients will still be eager to buy real estate because home prices are appreciating and it’s a safe investment over the long haul. Other causes for demand including millennials need a home to raise their families, households formation is rising, flips of older properties will continue to provide returns and foreigners are still eager to own U.S. property. Plus, the economy is expected to steadily improve under the Trump administration. In January 2018, the median number of days a home in San Diego remained unsold on the market was 21 days, compared to 18 days in December 2017 and 25 days in January 2017.

Also in 2018, mortgage rates are expected to remain affordable, Levine said. “The 30-year mortgage rate may inch up to between 4.3 and 4.5 percent for a standard, 30-year loan in 2018, which is still affordable for many buyers,” he said. “The combination of higher home prices and higher interest rates means mortgage payments will be higher in 2018 for the same home, which means a decline in affordability. Rising rates will hurt and eventually hit, probably due to volatility in the stock market. Still, perspective is everything. When my dad bought a home in 1981, the interest rate was 15 percent.”

Levine said it’s important for REALTORS® to get involved in their local communities, especially with planning and land use groups. “We don’t build enough homes in California and planning groups need to realize this,” he said. “We need to play catch-up. We could use another 100,000 new units annually.”

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