April 30, 2018
This spring’s home sales season is shaping up to be the most interesting one in years. The housing market will depend on which opposing force proves more powerful: long-term fundamentals of supply and demand, or near-term ripples emanating from Washington and Wall Street.
Most evidence that Orion’s brokers have seen suggests that fundamentals will prevail over time and push sales and prices higher, especially at the lower and middle tiers of the market. But the opposing forces could mean a period of uncertain deal making. Higher mortgage rates and a new tax law will affect several elements of home buying.
Our brokers, and their clients, know that mortgage rates are higher, but knowing the math around “affordability” is a little more complicated than that. You must also consider the potential tax deductibility of mortgage interest and how much cash a buyer has available for a down payment.
The tax law is messy. The United States tax code subsidizes homeownership in ways large and small. (Whether those subsidies encourage greater homeownership or just drive up prices is a different matter.) But the tax law enacted in December reins in several of those advantages.
Most directly, Orion’s brokers know that the law reduces how much mortgage debt will benefit from tax-deductible interest payments.
Supply and demand are mismatched. Those developments on interest rates and tax policy seem likely to be drags on home buying. But they come amid a housing boom rooted in a major imbalance between the number of people looking to buy, especially in cities with strong job growth, and the inventory available. But the rising demand has not been accompanied by increase in supply.
There was overbuilding relative to demographic trends in the mid-2000s housing boom, but the opposite has been true for a while, especially where Orion lends. The home-building industry attributes this to the constraints it faces like restrictive zoning laws, tighter immigration enforcement has limited labor supply in some markets, and prices of many building materials have risen faster than overall inflation.
In other words, when there are more families looking for a place to live than new homes in place to accommodate them, the pressure on prices and sales will be upward, no matter what happens as the market adjusts to higher mortgage rates and tax changes.