2018 Real Estate Predictions: More of the same…sort of
The final numbers are almost in.
#1. Inventory Stays Tight
The supply of inventory will remain tight, generally giving sellers the upper hand as buyers compete for a limited supply of move-in ready, market priced listings. Inventory levels will remain well below the six-month benchmark that divides a sellers’ market from a buyers’ market. That said, we will probably see inventory levels creep up to the 7-12 month range during the typical “summer simmer” in July at higher price points.
#2. Affordability Takes a Toll
The rapid rate of home appreciation along the Front Range has far outpaced income growth over the last few years, and the result is that many home buyers are finding it more and more difficult to afford a home in our market.
Affordability is not just a function of home prices and incomes. Prevailing interest rates play a big role as well. Looking ahead to 2018, recent national GDP growth of 3%+ and corresponding moves by the Fed portend higher mortgage rates in 2018. This could exacerbate our affordability challenges since every percent increase in interest rates reduces the home a typical buyer can afford by about 10%.
Even though Colorado’s employment picture is quite strong with one of the nation’s lowest unemployment rates at 2.7%, and a projected addition of 56,300 jobs next year according to the CU Economic Outlook, jobs are not enough to offset high home prices for some. In fact, 193,000 people moved out of Colorado last year, but 223,000 moved into Colorado, for a net increase to our population of 30,000. Still, that was the lowest level of in-migration in years.
The headwinds caused by affordability issues coupled with tight inventory will result in modest decreases of 0% to 5% in the number of homes sold in 2018 compared to 2017.
#3. Home Values Up 4% to 6%
Headlines throughout 2017 proclaimed that the market was cooling and home price increases were slowing down or even falling. At the end of the day, prices did not fall in 2017, but the rate of appreciation did moderate from double-digit gains in 2016 to the 6% to 8% range in 2017.
The Federal Finance Housing Authority’s most recent report pegged Colorado’s annual appreciation at 8.5%. Zillow reported a 7.5% increase in 2017 for Colorado.
We expect to see appreciation rates moderate even more in 2018, ending up in the 4% to 6% range. Falling affordability will take some buyers out of the market, but the conditions of low supply and high demand that drive up prices are firmly in place and will continue to fuel appreciation.
You may have noticed that our predictions have yet to reference changes to housing rules in the tax reform package that most observers now expect to become law. Changes that directly impact housing include:
- Lowering the cap of the loan amount for new mortgages that qualify for the mortgage interest deduction from $1 million to $750,000. Current homeowners will not be affected.
- Limiting the deduction for property taxes, and state and local income taxes and sales taxes to $10,000.
- Eliminating the deduction of interest on home equity loans. (Interest is still deductible on home equity loans if the proceeds are used to substantially improve the residence.)
- Increasing the standard deduction for individuals from $6,350 to $12,000 and from $12,700 to $24,000 for married joint filers reduces the incentive to itemize and claim the mortgage interest deduction.
Some, including the National Association of Realtors, have predicted that the tax reform package could cause a significant drop in home prices. While the new tax rules may influence the decisions and behavior of some home buyers, sellers, and homeowners, it is not clear how the combination of all these changes will manifest themselves in aggregate in the market.
A Refreshing Look at the Question “What is my House Worth?”
Let’s take a look at some of the stats for our area to get a better idea of what is going on in the local housing market!
In Arapahoe County for Nov 2017, the average sales price* was:
- $385,000 for Single Family Homes (up 8.5% from 1 year ago)
- $240,000 for Condos/Townhomes (up 12.4% from 1 year ago).
In Douglas County for Nov 2017, the average sales price* was:
- $475,000 for Single Family Homes (up 6.7% from 1 year ago)
- $310,000 for Condos/Townhomes (up 8.8% from 1 year ago).