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Date: January 7, 2019
Category: Real Estate

Inside Residential Real Estate Investing: Housing Purchases Shrink as the Economy Grows

Ten years after the U.S. housing crisis, Americans are finding it more difficult to claim the title of homeowner. Renting is on the rise, and the national homeownership rate has plummeted.

In 2005, the homeownership rate peaked at 68.8 percent, but just over a decade later, it had fallen to 64.4 percent.1 Additionally, in September, sales of new single-family houses were down 13.2 percent – the largest year-over-year percentage change since 2011.1 So, what’s causing this big change in housing preferences? There isn’t one simple answer; numerous factors are playing a role.

Rising interest rates = Higher mortgage rates

Most Americans are dependent on a mortgage when purchasing a house. But mortgage rates are on the rise. The benchmark 30-year fixed mortgage rate recently rose to 5.06 percent, a new seven-year high.2 To put it into perspective, for a house with a $250,000 mortgage, five percent rates add roughly $150 to the monthly payment, or an additional $1,800 per year. Multiply that by 30 years, and you’re looking at an additional $54,000.3

These higher rates are difficult for many to swallow, but it’s hitting first-time homebuyers the hardest. They tend to be younger, and as a result make smaller down payments compared to older, more established buyers who have built up equity in their previous homes.3

As a result, these higher mortgage rates have slowed the housing market more than many expected.3 They’re preventing consumers from making quick home purchase decisions, and many are scared to pursue a loan knowing the long-term payback. Instead, would-be homebuyers are opting for short-term options like renting.

New restrictions for state and local taxes

The Tax Cuts and Jobs Act (TCJA) of 2017 trimmed two important tax breaks for homeowners. First, in the past, homeowners could claim an itemized deduction for an unlimited amount of personal state and local income and property taxes. Meaning, if you were a homeowner with a big property tax bill, you could deduct the whole thing if you itemized. Also, homeowners could deduct personal state and local sales taxes on Schedule A instead of income tax.4

Now, TCJA limits itemized deductions for personal state and local property and income to a combined $10,000. This may negatively impact individuals that pay high property taxes because they own expensive homes, or own primary and secondary residences.2

The elimination of these two tax breaks are becoming a big problem for certain regions, specifically the Northeast. The percentage change year-over-year in new single-family home sales speaks for itself.

A historic shortage of new homes

Currently, there are fewer homes being built per household than at almost any time in U.S. history. A decade after the housing crisis, construction per household hovers near the lowest level in 60 years.5

This shortage is directly correlated with continuously increasing land and constructions costs. Since the end of the last housing boom, costs have roughly doubled, leading builders to shift their focus from starter and mid-price houses to high-end properties in an effort to generate a profit.5 Combine that with high mortgage rates and fewer taxes incentives, and you can see why it’s becoming even more difficult for first-time homebuyers to find room in their budgets. And it’s not just new homes that have low inventory levels. In the fourth quarter of 2017, overall inventory of new and existing homes for sale hit its lowest level on record – 1.48 million.5

As a result, it’s pushing up prices at what economists say is an “unsustainable pace.” In 2017, the S&P CoreLogic Case-Shiller National Home Price Index rose 6.3 percent. That’s roughly twice the rate of income growth and three times the rate of inflation.5

A more attractive option

It’s no surprise that rising mortgage rates and housing prices are making homeownership less attractive. Instead, many Americans are choosing to rent. In fact, 78 percent of Americans now consider renting to be more affordable than buying a home, up sharply from 67 percent six months ago. And these trends are impacting long-term plans too. Recently, 58 percent of renters said they had no plans to buy a home at all.6

An evolving American dream

The American dream is changing and homeownership is no longer a priority. The combination of rising mortgage rates, fewer tax incentives, rapidly rising home values, and low inventory will likely push some would-be buyers to rent and keep existing renters in place for much longer than intended.

1Bloomberg. Housing is Tanking in the Northeast. Guess Why. 10/25/18.
2Bankrate. Mortgage Rates Creep Up; Four-year Housing Inventory Decline Finally Ends. 11/1/18.
3Wall Street Journal. Mortgage Rates Fast Approaching 5%. 10/11/18.
4MarketWatch. How the New Tax Law Affects Homeowners – It Could Be More than You Think. 2/6/18.
5Wall Street Journal. The Next Housing Crisis: A Historic Shortage of New Homes. 3/18/18.
6The Real Deal. More than 75% of Americans Choose Renting a Home Over Buying: Report. 10/1/18.
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