What can homebuyers expect in 2018?

Informed sources are pointing at a cooling housing market heading into 2018. There are several contributing factors, including lowered immigration, less movement at the upper end of the market, rising mortgage rates, a move toward rentals, and knock-on effects of the tax reform announced at the end of 2017.
The $1.5 trillion tax cut has been controversial mainly due to fears that it disproportionately benefits the very wealthy. When it comes to housing, the new limits and reductions to mortgage interest, state, and local tax deductions are going to be felt most at the upper end of the market. Limitations on the incentives to make a new home purchase, or to purchase a home worth more than $750,000 are expected to slow the higher end market and put more pressure on less expensive housing stock, producing a cumulative slowing of all markets.
The tax incentives no longer privilege home ownership much more highly than renting, which could make first-time prospective home buyers less likely to switch over to get into the market, further cooling sales at a time when Millennials were just starting to come into their own and purchase starter homes.
Demand at all levels of the market comes from new households, split households, and investment properties. Lowered tax incentives and a projected rise in mortgage rates point to a likely slowdown in investment real estate speculation. New households and split household growth are fueled by immigration and families separating in cases such as divorce or a child or parent moving out into their own home.
With the current political atmosphere around immigration and foreign residents being discouraging, immigration and foreign-resident-fueled housing sales are expected to decrease, slowing the overall market. A further slowdown may occur if significant numbers who already own a residence choose to sell out and leave voluntarily, or in the case of deportation.
Regarding housing splits, the slow-to-launch Millennial generation are just beginning their march to the suburbs and family-home purchases. Look for more movement in condo and apartment stock, as confident singles reach a level of career security that allows them to achieve independence, and older adults downsize or move into age-in-place-ready units. Both populations tend toward urban locations with better services in the immediate surroundings.
Expect a cautious start to the year, with many homeowners taking a wait-and-see attitude toward the market. With less incentive to flip or speculate, and higher tax load with increased cost-of-living expenses, many homeowners, as well as prospective buyers, will be scrambling to adjust their budgets and accurately project their options. Trading up into a larger or more luxurious home will be a less attractive option under the current tax law. Switching from renting or living at home to owning a separate residence will be a tighter squeeze, with less incentive to make the jump, higher costs to investing, and higher day-to-day costs dragging workable budgets down.
One dubious exception to this trend will be in disaster-hit areas, where a significant amount of the housing stock was seriously damaged or destroyed over the last year. Some new construction will be needed to replace stock and take the pressure off. Localized markets, in general, will have a much wider range of demand and growth based on needs and shifts in that region. The pressure on cities will ease somewhat as Millennials move further out from city cores for better affordability and more space for growing families. Cities with strong job markets and preexisting housing pressure will experience slower cooling, and depressed regions with low employment and significant empty stock on the market will be hardest hit.
Speculators may want to look into building a portfolio of rentable units to serve the shift in the market and should target urban centers, transit corridors, and walkable neighborhoods for best results. For those looking into a first-time home purchase, or a necessary move or expansion, take a step back and rework your budget before jumping in. There are quite a few factors to review, and most of them are in the process of changing, or about to change. Look at national, state, and municipal laws and taxation, mortgage rate projections, home operating and improvement costs, and job security before committing. If you’re in it for the long game – current tax laws could be in effect for nearly a decade – you may be able to make a good return on your investment, but you need to make sure you can handle the load in the immediate future.
Ancillary costs to home ownership are projected at over $9,000 a year on average and include things like water, energy, cable, municipal services, yard and structure maintenance, insurance, strata fees, tax hikes, and surprise repairs. Many prospective buyers stretch or exceed their budget in order to get the neighborhood or features they want, or just out of a lack of awareness, and find themselves in a bind when it comes to ensuing costs. These costs can vary significantly depending on your region, climate, state, and municipal laws. Talk to local boards, realtors, and, if you have them, friends in the neighborhood, to get a sense of real costs. Heating or summer cooling can be minimal costs, or enormous, depending on your area. Tax rates and city services vary widely. Insurance costs and housing risks due to natural disasters also vary based on local concerns. Job security is another consideration; if you don’t have savings or insurance to cover unexpected unemployment, or if your job may require relocation within the next few years, you may want to keep renting and keep saving for a little longer.
One way to be prepared and manage risk while moving forward with real estate investment is to get homeowner insurance. American home warranty companies provide coverage for things like repairs and replacements to failing home systems and appliances, so you’re not caught in an impossible situation when unexpected costs crop up.
While 2018 is expected to be a slower year on the housing market, as long as you do your research and have good margins, you should be safe to move ahead with a new home purchase regardless of what level of the market you’re targeting.