How The Housing Market Is Impacted By The New Tax Code

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rusty-tweedIn 2017, the United States saw the most impactful change in tax laws since President Reagan. With the creation of the “Tax Cuts and Jobs Act,” things like tax brackets, deductions, and exemptions were completely altered. The brackets, per se, got pushed to help people avoid paying as much tax on their earned income. Similarly, the standard deduction got increased to compensate for the removal of the personal exemption. What a lot of people do not know, however, is that the tax law changes also impacted the housing market.

Unless one is a long-term real estate investor, they may not be familiar with all the tax implications of property transactions. These include far more than simple property tax rates and moving deductions. So, how exactly did the new tax code impact the housing market?

Reduced Mortgage Deduction Limit

In the past, homeowners were allowed to deduct interest on up to $1 million of debt used to buy a home. This means that married couples who took out mortgages going up to $1 million could deduct all of their interest on that debt. Doing so helped reduce taxes as this deduction almost always exceeded the standard deduction just by itself. Now, however, the most amount of debt that can be used to deduct interest on is $750,000. For those who are married filing separately, that deduction is only $375,000.

This indicates that the tax code reduced the amount of debt that is eligible for interest deduction by 25 percent. For homeowners, that means 25 percent less in deductions when the time for filing a tax return comes. Thus, if they used to take out $10,000 from their taxable income via mortgage interest, they will now only be allowed to take out $7,500. In the long-run, those numbers will impact homeowners as they will have to spend more on taxes. Consequently, the housing market may drag slightly as people work to compensate for this 25-percent loss.

Moving Expenses

In the past, taxpayers were allowed to deduct moving expenses in the form of an itemized deduction. This was done using a form numbered 3903, and it could add up to a substantial decrease in tax liability. As of 2018, however, it no longer applies to every taxpayer in the U.S.

Instead, this provision of the previous tax law was suspended until 2025 and only applies to military-related moving. Meaning, only those that are relocating as a consequence of their service to the armed forces will be eligible for the deduction. In turn, buying a home across the country may not be a light decision anymore, if it ever even was. People will now have to include moving expenses in the price of the home as they will not be getting any of those costs back.

Home Equity Debt Loan Deduction

Before the new tax code, those with large mortgages could treat $100,000 of their debt as home-acquisition debt. The only requirement in place was to use that amount of money for buying a new home or improving an old one. The old one, of course, had the be the first or the second residence that the taxpayer bought. If those conditions were met, people were allowed to deduct interest on that additional $100,000 as well. Although it was not as considerable as the deduction above the limit ($1 million) that was mentioned, it helped increase overall savings.

After 2017, however, this provision goes away as well. In translation, there will be no additional $100,000 that people can use to increase interest deductions. Thus, that could potentially put another strain on homebuyers who want to maximize tax relief.

Apartment Demands Paces Elevated Construction

Rusty Tweed

Rusty Tweed

In a recent study, there has been shown a tremendous growth in demand for people who are looking for apartment units. As a result, more real estate companies and property industries have been trying to fill in the need, through construction and improved marketing strategies.

Property development of apartments remains at an all-time high, especially for Class B and C types of units. As investors try to leverage this trend, more of them are trying diversified real estate portfolios to maximize their profits.

Why is apartment demand on the rise?

The increase in demand for apartments is for several reasons. Since properties tend to appreciate over time, more and more people are looking for practical means to invest in a home. Apartments are a great way to reduce cost and are more affordable than paying the mortgage for a large house which may even be double or triple the price.

Due to this increased need, more investors are looking into building apartment units that people can rent. This gives an opportunity to create passive income in real estate, especially when the investor owns several apartment units for rent.

Additionally, apartments are also practical since most of the maintenance needed within and outside the unit are covered by the owner, and people only resolve to pay monthly rental bills as well as utility expenses. For an individual or a family who is trying to make ends meet, this can prove to be more cost-effective than going through the hoops of finding a loan approval for a home, paying steep mortgage fees, and utility or maintenance bills.

Benefits of investing in apartments

There are many benefits of investing in apartments. If you are in the real estate industry, you may very well be aware of some of them:

  • Provides an opportunity for passive income – passive income through apartment rentals is possible. A lot of individuals and families are looking for apartments where they can stay for short-term or long-term. Other ways to build passive income through apartment rentals is through vacation lodging websites such as Airbnb.
  • Cheaper than a home – to purchase an actual home, you would have to have an excellent credit score to secure a good loan. With apartments, the entry level is low, especially if you are only purchasing a single unit.
  • More opportunities for clients – since there is a reported increased market demand for apartments, you are sure to find clients who are interested in purchasing or renting out your units.

Strategies for real estate apartment investments

Given its wonderful benefits, here are some ways to help you maximize your apartment investments:

1. Invest in apartments in progressive cities

As a basic principle of real estate, investing in apartments is also about location. Location is a primary factor in finding opportunities to invest in apartments. If you are hoping to rent out the units after your purchase, you may want to consider if there is a potential that someone could live there because there are job opportunities, people want to start their families, or there are other nearby commercial establishments.

2. Buying empty lots vs. established units

Another thing to consider is if you want to buy an empty lot to make your apartment units, or if you want to purchase a second-hand established building. The great thing about purchasing a lot would be the possible lower prices of construction.

Since there is an increased demand and construction productivity over the recent months in apartment real estate, you can be confident that you can build your unit from scratch without overspending. However, it may also be a good deal if you plan to purchase a pre-made unit under repossession. All you have to make sure is that every part of your purchase is in top quality, and if there will be repairs, it would only be minimal.

3. Buy and sell vs. renting out

Apartments can also be a tricky business but are profitable when done right. Before investing, it may be important to think of the way you want to approach your apartment purchase. Do you want to flip apartments through buy and sell tactics, or do you want to maintain your unit for rent?

With buy and sell, you are able to gain a profit from a single purchase, but there is no recurring income. With renting out properties, you can have recurring income but you have to deal with renter issues and other maintenance problems.

The increase in demand for apartment units is good news for all real estate investors. If you haven’t diversified your portfolio yet to include apartments, now is the time to take it into consideration. With the right strategy, proper location, and marketing strategy, you are sure to pool in clients who are interested in your real estate properties.

 

2018 Housing Market Forecast

When the housing market was growing out of proportion during the years leading up to the economic crisis of 2008, the rapid growth created something that became known as the “housing bubble”. As predicted by many experts yet not enough average citizens, the entire market soon came crashing down and destroyed the short-term economy of the country. This resulted in many issues for the financial industry that was closely tied to the housing endeavors and many people were pushed into foreclosures. Now, a decade after the unfortunate downturn, the housing market seems to be showing a much healthier growth.

First, one of the reasons that the crash was inevitable was due to the growth that largely exceeded the capacity of the demand and supply. In turn, the natural equilibrium was non-existent and the only way to retrieve it was to push the “restart” button which, in this particular case, was the aforementioned crash. Nowadays, however, the housing market has been growing at much more reasonable rates that have not topped a 5-percent yearly increase in construction projects. This enables the buyers and sellers to slowly increase their operations and ease into the broad change that affects pricing models. Thus, it seems that the proper forecast for the housing market must be depicted in form of a very positive picture.

What contributes to the current growth patterns is the fact that the markets are also witnessing an increasing number of high-income rentals. Given that the most common alternative to purchasing a home is to rent one, lenders who are increasing their prices are certainly contributing to people’s decisions to obtain a mortgage. This simply showcases a case of complement goods. Meaning, when the price of one of the assets in question goes up, the relatively “low” price of the other becomes more attractive. Hence why lenders who are deciding to spike up their leasing charges are giving rise to people becoming more curious about the prospects of just buying a property for themselves.

Lastly, the long-lived streak of mortgage rates that were below 4 percent made it possible for countless would-be homeowners to actually become one. As a byproduct of the recovering economy, the banks and nonconventional lenders had their mortgage interest rates set below 4 percent for a record-shattering 26 weeks. With such a rate, those interested in a high-end liability in form of a loan were invited to obtain one as the cost-benefit ratio outweighed their prospects of continuing to pay rent every month. Ultimately, if this trend continues, it would not be surprising to see the housing market reach its heights again. This time, however, the risk of a crash would be minimal as the growth is occurring naturally.

The Recovery of the Housing Market Prices

When the United States went through the recession in 2008, not many analysts anticipated such a prolonged period of adverse consequences. The downturn in the economy, that was primarily caused by the housing market bubble, however, is now in the rearview mirror. Or at least, that is what the latest reports created by The Standard & Poor’s Case–Shiller Home Price Indices showcase.

Before diving into the number-heavy data that is the main reason to believe how the housing market is in its “rebirth” stage, defining Case–Shiller Home Price Indices must be done. Basically, Case-Shiller indices are the so-called house price indices for the United States. The numbers are calculated by looking at a minor subset of homes and then generalizing these results on large populations sizes with matching criteria. The ones that are going to be brought up here come from the 20-city composite index as well as the national home price.

With that being said, the latest 20-city index shows a 0.5 percent monthly spike that translates into a 6.2 percent yearly increase in the house prices. The national index, similarly, demonstrated a 0.7 percent increase on a monthly level while the annual rate accumulated to the same 6.2 percent. This is exciting news for the housing industry that has been recovering since 2008 when it faced some of its darkest times.

Even though the aforementioned data clearly presents a reason to be enthusiastic about the future home prices, there is always more to the equation. Case-Shiller’s index is a very prominent tool that millions of people utilize to track real estate prices, but it has its shortcomings. This is why looking at more reports will help minimize the margin of error and facilitate accurate results.

According to Trulia, another outlet that can conduct a market analysis of real estate prices, the nation is still not completely recovered. Ralph McLaughlin, the chief economist for Trulia, indicates that only one-third of all homes have been able to go back to the prices they held before the recession. The other 66 percent can expect to reach those same levels by 2025. If one was to neglect data from an outlet like Trulia and only focus on Case-Shiller’s index, they would expose themselves to wrong interpretations masked by positive numbers.

Regardless of the discrepancies between the levels of optimism shown by Trulia and Case-Shiller’s index, one thing stands – the country is moving in the right direction when it comes to the housing industry. Even if only one in three homes is back at its pre-recession prices, this is a clear sign that the economy is getting better and negative outliers could be neglectable soon. For example, the following data can be treated as a bottom line prediction for where the United States is headed:

  • Number of large cities that have seen positive changes to home prices: 17 out of 20
  • Number of large cities that experienced home price reductions lately: 3 out of 20

Importantly, the aforementioned only applies to monthly levels. When looking at those same 20 cities, every single one of them has seen positive movement in home prices on an annual level. Thus, 100 percent of the sample size analyzed by Case-Shiller’s Index is doing better yearly, while 85 percent is even doing better monthly.

No doubt, Trulia and its chief economist Ralph McLaughlin have a great point when it comes to holding people culpable and not letting anyone get overly excited. Nevertheless, the momentum that the housing market now holds might prove to be just enough to bring back the prices from 2006 or 2007.

Strong Job Creation Numbers Inspiring Young Workers to Enter Housing Market for First Time

For an entire generation of young people, growing up during a time of economic uncertainty has had an undeniable impact on way they approach all manner of financial decisions. Members of this generation have exercised great caution while adopting a risk-averse financial philosophy, and this philosophy has in turn limited their willingness to consider entering the housing market for the first time.

The limited interest among members of this youthful demographic has had a measurable effect on the real estate industry, but it appears that the strength of current economic conditions might finally be enough to convince these young people to test the housing market. It appears that the recent reports of strong job creation numbers — along with a wealth of job openings representing a record high — have inspired a sense of confidence among the group of people least likely to act hastily based on a report of the most recently available economic statistics.

Of course, this does not mean that this youthful generation has not faced difficulties upon entering the housing market for the first time, particularly since the inventory of single-family homes available for purchase is currently at an all-time low. Combined with the fact that apartment vacancies presently stand at just under four percent (3.8 percent, to be precise), it is clear that the sudden increase in demand cannot be met given the currently available supply even when one considers that 371,000 new units are expected for delivery in the next 12 months — not to mention the fact that new apartment construction has never been higher in the past 30 years.

It is not only the residential real estate market that is experiencing the influence of the continued return of strong economic indicators, as the commercial real estate market is also dealing with a level of demand that cannot be met by the current pace of new commercial real estate construction.

This is especially true as it relates to financial services employment as well as professional and business services employment, all of which have outperformed the labor market as a whole. Since companies within these fast-growing categories have primarily targeted recent college graduates for recruitment to new, office-based positions, the demand for new commercial real estate has increased at a rapid rate greatly exceeding the current pace of commercial sector construction.

With the expectation that 2 million new jobs will be added by the close of 2017, there is some concern that a large percentage of these positions will nonetheless go unfilled due to a shortage of skilled workers available for what is now a total of 6 million job openings currently available in the United States. Keeping these and other economic figures in mind, the Fed has continued to favor a moderate monetary policy in an economy lacking any sign that it may be prone to overheating.