MID-YEAR REVIEW

At the end of 2017, we posted Five Housing Market Questions for 2018, followed by a brief comment on each question. Our goal was to provide an overview of what we expected in 2018.  By request, here is a quick Mid-Year Review. I've included my comments from the beginning of the year, with a brief review and a few comments.

5. Will the New Tax Law Impact Home Sales, Inventory and Price Growth?  

The low end of the housing market will be fine. The Mortgage Interest Deduction (MID) will be capped at interest on a mortgage up to $750,000 instead of $1,000,000, so the lower priced markets will not be hit by the reduction in the MID. There might be some additional taxes for these buyers due to the limits on SALT and property taxes, but this should be minor.



The high end of the market to be fine. The high end is already doing well even with the MID capped at $1 million. For these buyers, the bigger impact will be the SALT and property tax limitations. Many of these buyers will also benefit from the changes to the Alternative Minimum Tax (AMT).



It is the upper-mid-range in the certain markets that will probably slow. This might be in the $750,000 to $1.5 million price range. These potential buyers probably don't benefit from the AMT or corporate changes, but they will likely be hit by the SALT and property tax limits.  

Mid-Year Comment: It is early, and there isn't any clear evidence of an impact from the new tax law, although some areas are now seeing a year-over-year increase in inventory. This could be a leading indicator that price growth will slow.



4. Will housing inventory increase or decrease in 2018?

Our guess is active inventory will increase in 2018. Inventory will decline seasonally in December and January, but expect to see inventory up again year-over-year in December 2018.  

Mid-Year Comment: According to the recent reports, inventory in Southern California was up 8.3% year-over-year. It seems likely that inventory will be up year-over-year in December.



3. What will happen to house prices in 2018?

Inventories will probably remain low in 2018, although we expect inventories to increase on a year-over-year basis by December of 2018. Low inventories, and a decent economy suggests further price increases in 2018. Perhaps higher mortgage rates will slow price appreciation. If inventory increases year-over-year as we expect by December 2018, it seems likely that price appreciation will slow to the low-to-mid single digits.

Mid-Year Comment: It is early, but the data released last week showed prices up 7.1% year-over-year in May. The year-over-year increase was higher than last year, and there is no evidence of price increases slowing yet.



2. How much will Residential Investment increase?  

Analysts are looking for starts and new home sales to increase in 2018. We also think there will be further growth in 2018.

Mid-Year Comment: Through May, starts were up about 10% year-over-year compared to the same period in 2017, and New home sales were also up about 8% year-over-year.  



1. Will the Fed raise rates in 2018, and if so, by how much?

Our current guess is the Fed will hike rates three times in 2018 and increases will be small.

Mid-Year Comment: The Fed has already hiked twice in 2018, and it now appears there will be four hikes this year.

Currently it looks like 2018 is unfolding about as expected.