Will the Housing Market Fall in High Cost States in 2018?

mortgage rates go up

Last year, many financial experts expected home price growth would moderate as interest rates rose, but that did not happen in much of the country. Rather, the housing market overall got hotter as inventory got tighter and prices went up, and interest rates did not rise significantly.

As for 2018, we can expect to see things to change somewhat, but not in major ways in high cost areas such as California, Seattle, New Jersey and other high-income areas.

Pace of Sales Will Slow but Not All Year

The new federal tax law will have some effect on home sales and prices. The mortgage interest deduction and property tax deduction has been lowered. This will have an effect in higher cost areas of the country as there is a limit of mortgage interest deductions to mortgage debt of $750,000. Many homes in the more expensive parts of California cost more than this. The property tax deduction is limited now to $10,000 per year. This will affect high cost areas, too.

So, it is possible there could be some cooling off in the housing market in some parts of the country with these higher prices. But many experts think that underlying demand in the West and in much of the US will stay strong as wages are rising and unemployment is low. There also is pent up demand from renters and lending restrictions are easing, so there should be more pressure on home prices going forward in 2018 and beyond.

Low Inventory

A lack of inventory was the story across many markets in 2017, especially in expensive parts of the country. Zillow reported at the end of 2017 that housing inventory had declined by 10% in the previous 12 months. Data from Redfin showed there were 653,000 homes for sale across the US in November. By comparison, there were 967,000 homes for sale in November 2010. Low inventory has been driving prices higher, especially in high cost regions.

In 2018, most experts think inventory will increase a bit. The big reason for this is that this current situation of low inventory cannot last. Prices cannot continue to rise faster than wages. Trulia states that 30% of Americans think this year will be better than last year to sell their home. New construction also has been moving away from apartment buildings to single family homes, which shows that the housing market may start to see more inventory soon.

Price Growth Will Slow but Will Not Stop

Home prices across America have risen for 23 straight months. In 2017, the Case Shiller US National Home Price Index increased almost 6%. This was the biggest gain since 2013 when the market finally recovered from the mortgage meltdown. The hottest markets in the US last year were in Seattle and Las Vegas, where closing prices were up more than 10%.

Experts think prices will keep going up in 2018 but the rate of increase will begin to slow. Rising prices will continue to be the norm because of the low rates, rising wages and low unemployment.

Rent Vs. Buy Could Be Towards Renting in High Priced Markets

As we noted earlier, it is getting more expensive to own a home in more expensive markets. For some people in high cost California and Washington, rising prices and the tax changes could make it more logical to rent rather than buy. The higher costs of homes in these markets also make it more challenging for people to afford a big down payment.

Mortgage Rates Will Stay in 4% Range

Short term interest rates have been increased slightly to around 1.50%. Usually, this type of movement will cause rates for mortgages to rise, but three increases in 2017 and two the year before only made mortgage rates slightly higher.

Experts think that mortgage rates will be in the 4-5% range this year. This is a bit higher than last year, but still very low. The relatively low rates should continue to cause demand in more expensive parts of the country to stay fairly high and could lead to more price pressure.

Millennial Demand Is Rising

After a decade of home ownership rates going down, they started to rise in 2017 to nearly 64%. The all time low in recent history was 62.9% in 2016.

People born after 1980 have been slower to enter the home buying market but now that the economy is really recovered, more are entering the market. In the more expensive areas, this will cause prices to rise somewhat this year.

The bottom line is that prices will continue to go up this year in higher costs areas and in much of the US. How much depends upon the unemployment rate and housing starts in the specific market, but generally expect prices to continue to rise.


References:  Forbes 2018 Housing Outlook.




Member of the National Notary Association
Heather has been a mobile notary public for 7 years.
She has been in the real estate industry for the last 12 years.
Her background includes real estate marketing, administration, transaction coordination and loan doc. signing.

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