Inventory will be the major factor shaping the 2018 housing market, but that’s nothing new. For the third year in a row, the nationwide inventory shortage is likely to continue to hinder sales and increase prices. We expect small increases in inventory at the high-end of the market by year-end. Starter-home inventory has not increased meaningfully since 2011, and we don’t expect it to increase at all next year. Exacerbating the problem is high rents and vacation home rental platforms that make it both easy and lucrative to own more than one home.
If state and local tax (SALT) deductions are eliminated in high-tax states like California, New York, New Jersey, Maryland, Massachusetts and Illinois, people will leave these states for places where they can get more home for less money. In a survey of 900 homebuyers, a third of respondents said that they would consider moving to another state if they could no longer deduct state and local income and property taxes. The housing markets affected by potential tax changes account for one in four of the homes sold this year in the metros Redfin tracks. Redfin’s latest Migration Report showed people looking to leave expensive coastal cities for more affordable mid-tier cities like Sacramento, Phoenix and Atlanta. Nashville was among the top 10 migration destinations for the first time. The trend has already started, and tax reform, if passed, will just intensify it.
There’s a lot in flux with tax reform as the House and Senate work to reconcile their two bills into one that the president can sign into law. However, both bills include a major change in tax deductions for home sellers that is likely to make it into the final bill. Under current law, single homeowners can exclude $250,000 of sale proceeds from capital gains taxes as long as they’ve lived in the home for two out of the previous five years. Couples can exclude up to $500,000. However, the new proposal increases the number of years to five of the previous eight years, in order to deduct gains. This change will incentivize some homeowners to stay in their homes longer.
Certain high-income millennials are driving the formation of a new kind of neighborhood–the Urban Suburb. These homebuyers want an urban lifestyle, including walkability and amenities, and also they want highly rated schools. And they’re willing to pay for it. Enter the Urban Suburb. Builders are responding by building homes with two or three bedrooms near public transit, restaurants and retail.
“We’re not talking about the Baby Boomer McMansions with huge yards, where you have to drive a couple of miles for a cup of coffee,” said Redfin Kansas City agent Wayne Gray. “We’re talking about neighborhoods outside the city, but still relatively densely populated, with walkable amenities and bikeable commutes.”
Below is a list of Urban Suburbs that are on the rise in 2018, including their *Walk Score and GreatSchools ratings. Price growth in these neighborhoods is strong.
*Walk Score measures proximity to urban amenities on a scale from 0 – 100 based on walking routes to destinations such as grocery stores, schools, parks, restaurants and retail. Scores above 70 indicate that most errands can be done on foot. Scores between 50 and 69 indicate that a neighborhood is somewhat walkable. Cities with scores below 50 are car dependent. GreatSchools provides a ranking from 1 to 10 based on a variety of school attributes.
The 2017 housing market was fast, with 25 percent of homes selling in two weeks or less during the peak of the buying season, and nearly 1 in five homes (19%) off-market in less than a week. We expect 2018 to be even faster.
We expect the 30-year mortgage rate to inch up to between 4.3 and 4.5 percent in 2018. In October, the Federal Reserve began reducing the size of its $4.5 trillion asset portfolio that includes $1.7 trillion in mortgage securities. Mortgage rates are expected to slowly increase as a result of this portfolio reduction. The combination of higher home prices (6%+) and higher interest rates means mortgage payments will be higher in 2018 for the same home. Monthly payments of principal and interest rose 13 percent in 2017 compared to a year ago, according to Corelogic. We expect an even higher increase–climbing as high as 15 to 20 percent–next year.
In 2016, the housing market broke records for speed, competition and demand, all while prices continued to rise. This has caused worry about a housing bubble in 2018, especially in West Coast markets like Los Angeles, San Francisco and Seattle. However, we do not see a bubble anywhere in 2018 for two main reasons:
First, buyers and sellers remain on the same page when it comes to price, with a sale-to-list ratio at 100 percent or above in the most expensive West Coast markets this year. Even in Boston and Washington D.C., the two East Coast markets tracked by Redfin where we’ve seen strong price increases, sale-to-list ratios are above 100. Nationally, the sale-to-list ratio is the highest we’ve seen at Redfin, reaching 99 percent in 2017.
Second, in West Coast metros where prices have now surpassed their 2006 peak, homebuyer debt has declined. The amount of mortgage debt as a percentage of the value of the home (known as loan-to-value) is a good signal that price growth will continue next year at about the same rate as 2017.
“Even with some people leaving for more affordable areas, we still have more demand for homes than we can fulfill,” said San Francisco Redfin agent Miriam Westberg. “The bigger concern is that we don’t have enough inventory to support a healthy supply of relatively affordable homes. Even with a million-dollar budget, first-time buyers are surprised at how few homes are for sale.”
Roommates accounted for 6.6 percent of all households (8,330,000 households total) in 2017, according to Census data. A decade ago roomate households were just 5.6 percent of the population (6,479,000 households). We believe the trend of more people living with roommates will accelerate in 2018 due to the lack of affordability combined with new startups aimed at solving the problem. Real estate startups like the app Nesterly, which pairs millennials with Baby Boomers; and CoBuy, which supports group home-buying, are just two examples of technology fostering non-traditional home-buying and cohabitation. We love the innovation, not to mention the new sitcom possibilities.
