People who are considering a home purchase in 2018 have interesting market conditions to think about before deciding. Below is a quick analysis of the major factors to weigh as you decide if it is time to buy your own home in 2018.
Mortgage Rates Are Still Low…When Will They Rise?
One of the more surprising facts about the housing market in the last two years is that mortgage rates have still not risen significantly. The Fed has raised rates several times in the last 18 months, but this has not yet caused a major rise in rates.
According to Freddie Mac, it is unlikely we will see rates this year above 4%. It seems that mortgage rates have been operating under a glass ceiling for quite some time. The last time the 30-year fixed rate was above 4% was in July 2017. Since then, rates have stayed under 4% for nearly six months. Many financial experts say this is illogical.
The stock market is in the range of 25,000 or 26,000, with the S&P 500 up 20% from a year ago. This type of economic growth usually increases mortgage rates as investors get out of bonds and put money into stocks. But higher rates still have not arrived.
Many analysts believed we would see 4.5% rates at the end of 2017, but the highest rate we saw last year for a 30-year mortgage was 4.3%. And today the rates are near 4% again. This is hard to understand because when the economy is doing this well, rates almost always rise a good deal. In 2007, in the middle of the previous boom, we saw rates near 6.75%.
The artificially low rates could be because wages for average workers still have not risen enough to encourage people to spend more money. Also, inflation is still very low, and this is keeping rates down.
The bottom line on rates is that they are too low for market conditions. It is inevitable they will rise, and it could be 2018. Here are the rate predictions by major players for 2018:
- Freddie Mac: 4.4%
- Mortgage Bankers Association: 4.6%
- Kiplinger: 4.4%
- National Association of Home Builders: 4.2%
Our best advice would be to not wait around for rates to drop. They are probably near the bottom of where they will be in this economic cycle. If rates rise as we expect and home prices continue to rise as well, you will have considerably less buying power.
Home Prices Are Still Rising
A recent report from the National Association of Realtors found home prices were rising an average of nearly 6% in 2017 from the year before. It is expected they will continue to rise at a similar rate across the country for 2018.
Of course, the home appreciation trend will vary a lot by the area of the country. There are some parts of the West Coast that are seeing 20% appreciation per year, but parts of the Midwest are seeing only 2-3% growth per year. It is very important to do deep research on home price trends in your specific area to determine if you are in a buyer’s or seller’s market. If you are in a higher appreciation part of the country, it could be smart to buy in 2018 before the economy gets even stronger.
New Tax Cuts Could Have Strong Economic Effect
A new curve ball in the ‘should I buy a house now?’ debate is the new tax law that just went into effect. This is a major change to tax rules, and we think it could lead to significant economic growth for 2018 and beyond. Most taxpayers will see a tax cut, and the standard deduction has been doubled for single and joint filers. This will lead to more money in people’s pockets and more economic growth.
On the other hand, mortgage interest write-offs have been reduced. The write off for a first mortgage is now limited to $750,000 of mortgage debt, while the write off for state and local taxes is capped at $10,000. These factors could reduce home prices in some expensive markets.
Again, it will pay off if you study the market trends in your specific area to determine if prices are rising and how quickly. Generally, the tax cuts will have a positive effect on prices, but they could fall in the more expensive real estate markets.
We generally favor buying a home in 2018 because rates have been artificially low for quite a while. It is unlikely the rates will go lower, and it is inevitable they will rise as the Fed raises key interest rates and economic activity increases.