Consumer confidence is at a 17-year high, and mortgage rates have been steadily climbing since January. As of mid-March, the U.S. weekly average 30-year fixed mortgage rate was 4.44%, 0.49 percentage points higher than in January.
Given that the economy is going strong, Freddie Mac forecasts the 30-year fixed mortgage rate to average 4.9% in the fourth quarter of 2018.
Even with higher mortgage rates, the housing market should post modest growth in 2018. Clearly, there are winners in the housing market, but for some, it’s been tough to penetrate the market. Below are a few aspects of home price appreciation.
Nearly two-thirds of homeowners are on a winning streak
According to the Freddie Mac House Price Index (FMHPI), home prices have increased 37% nationwide on a seasonally adjusted basis since 2009. In Exhibit 2, compare the annual percentage change in house prices by year over this expansion compared to the 1990s expansion. Homeowners are racking up record amounts of home equity; about $14.4 trillion in the fourth quarter of 2017, per the latest data from the Federal Reserve. According to Black Knight Data & Analytics, homeowners with mortgages have nearly $5.4 trillion in “tappable” equity.
Not all homeowners saw a significant rise in home prices
Thanks to fast-rising home prices, the share of underwater borrowers has fallen in recent years.
While home price trends have favored homeowners, not all homeowners saw their home values appreciate at the same rate. For example, since 2009, homeowners in California and Colorado saw a more than 60% increase in their home prices while homeowners in Delaware saw only a 3% increase.
The new tax bill disproportionately affects homeowners
The new tax law has several provisions that will affect homeowners in different ways. The February Outlook illustrated how the new federal income tax provisions may affect two hypothetical families. Due to the new limit on the deduction of state and local taxes including property taxes, homeowners in states with high property taxes and high home prices will be the most negatively affected.
Home Equity Lines of Credit (HELOCs) are popular means to tap into home equity. Under the previous tax law, the interest paid on HELOCs generally was deductible regardless of how the money was spent. Under the new tax law, however, the interest paid on HELOCs is no longer deductible. This is a big disadvantage for homeowners who wish to use HELOCs on other expenses, such as student debt or credit card payments. Beginning in 2018, the use of HELOCs on such expenses is considered “home equity indebtedness” and is no longer deductible. This change in the tax law could cost families thousands of dollars over the coming years.
Fixed-income homeowners are burdened by higher property taxes and potentially by higher federal income taxes
While house price appreciation is generally good for homeowners, it comes with a cost; higher property taxes. Research shows about 90% of homebuyers chose a 30-year fixed-rate mortgage in 2016. Under this mortgage option, the monthly principal and interest payment is constant over the 30 years of the loan.
What comes as a shock for those with fixed incomes is their increased property taxes. Some states, including California, have laws restricting increases in property taxes (1% of full cash value). The differences in state laws result in considerable differences in property tax levels across the United States.
Additionally, the new limit for the home mortgage interest deduction may put more pressure on homeowners living on a fixed income.
First-time homebuyers (mostly young adults), may be pushed out of the market
Over the past year, home prices in the U.S. rose by more than 7% on a national basis, pushing many first-time homebuyers out of the market. Los Angeles is among the Top 10 metropolitan areas that saw the greatest gains in additional share of income needed to buy a starter home from Q4 2016 to Q4 2017. Salt Lake City, UT, topped the list, with a 31% gain in starter home prices. With this gain, homebuyers needed an additional 9% of income to buy a starter home in that area. Los Angeles was eighth, with an 8% gain in starter list price, and additional 5% needed to buy. Given that the median income grew only modestly in many of these markets, many first-time homebuyers were pushed out of the market.
What does all this mean for the housing market?
Overall, U.S. housing markets have been on the upswing. With construction ramping up slowly to meet housing demand, home prices are likely to continue rising above the rate of inflation, which would further widen the gap between housing market winners and losers.