Over the past several months, prospective home sellers and home buyers have been in suspense about the new changes to Federal tax rules and how it will affect the housing market.
For prospective home buyers, the big question has been whether buying a home is still a good investment, despite the reduced tax benefit of mortgage interest and property tax deductions.
For prospective home sellers, will the reduced tax benefit of these deductions discourage buyers and therefore drive a decrease in home prices?
First, some good news:
Rapid economic growth in recent quarters, the booming stock market, and continuous job gains fueled substantial demand for buying a home in 2017*. Nationally, existing single-family home sales jumped 5.6 % year-over-year in November 2017 and hit an 11-year high**. These home sales showed no signs of the uncertainty that buyers faced in November regarding the impact of the tax plan. In the Northeast, in November, existing-home sales rose 6.7 percent to 800,000*. Locally, housing sales in Warren, Watchung, Long Hill, Berkeley Heights, and New Providence remained strong. In 2017, homes went under contract in less than 2 months. Homes in our local market sold for 98% of the list price. *****
Foreign investors in real estate assign high importance to the potential for wealth and security. According to new research, the U.S. is expected to offer both more than any other country in 2018. The U.S. was named the No. 1 nation for foreign investment in real estate in the annual survey by the Association of Foreign Investors in Real Estate. 58 % of respondents to the survey give the U.S. top marks in security, stability, and capital appreciation. 86 % of respondents, plan to continue or increase their current investment, in the U.S. in 2018***. Los Angeles and New York came in at No. 1 for foreign investors in real estate in 2017. New York—No. 1 in the world in 2016, was ranked No. 2 worldwide in 2017. Our local housing market continues to benefit from our proximity to New York. International buyers, many who are cash investors, are a strong segment of buyers in our communities.
Mortgage interest rates continue to be stable and low. A 30-year fixed rate conforming loan has remained in the 4% range for the past 13 months.**** However, with current economic growth continuing, mortgage rates are forecasted to hit 5% by year end 2018.** This will motivate serious buyers to purchase homes now.
The Tax Cuts and Jobs Act --Why a home purchase is still a good investment
Homeownership has always been key for middle-class wealth-building and financial stability. Homeownership can be a long-term investment that pads retirement savings and provides a safety net for unforeseen circumstances in the form of home equity. The survival of the capital gains exclusion means that homeowners will continue to benefit from this investment. The new law continues to allow homeowners to exclude up to $500,000 of the gain on the sale of a home.
Taxpayers in lower tax brackets, many who are renters, will see a tax cut, increasing after-tax incomes by approximately 2.2%.*** This will increase disposable income. As people get more savings in their pocket, buying becomes the better option.
While the tax law reduces the threshold for the mortgage interest deduction from $1 million to $750,000, it is important to note that the new limitations on the deductions will affect only 2.5% of all existing mortgages in the U.S.** **
For real estate investors, the tax law preserves business interest deductibility for real estate and the Section 1031 like-kind exchanges for real property.
Our local housing market will continue to hold value for home buyers and investors due to our proximity to major employers, New York, excellent schools, and reasonable property taxes.
* Lawrence Yun, Chief Economist, NATIONAL ASSOC OF REALTORS
** Joseph Kirchner, Senior Economist, REALTOR.COM 12/30/17
***RIS Media, 1/10/18
*****Garden State MLS
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