Photo: Robert Clark

There has been a fair amount of uncertainty surrounding the US housing market so far in 2018. The Tax Cuts and Jobs Act has cast a long shadow on the market, shaking the confidence of both homebuilders and buyers alike. Not to mention, home prices are up as inventory continues to tighten.

As the first quarter of 2018 winds down, we decided to take a look at some of the biggest factors impacting the US housing market so far this year.

1. The inventory crisis

National housing stock is falling well below historic norms, particularly in the starter home market. Demand for these homes continue to push prices upwards. One reason there are fewer homes for sale is that many existing homeowners are choosing to stay in their homes longer simply because they like their homes, according to a recent survey conducted by the National Association of Home Buyers (NAHB).

“The result suggests that a desire to keep a low mortgage rate is far from being the primary culprit for the reduced mobility seen in recent years, as is sometimes attributed,” says NAHB.

Lack of available affordable housing is pushing many renters out of larger metro areas and into smaller cities with lower tax rates. And, as a result, average rents are rising more rapidly in smaller cities compared to mid-sized and large cities.

“Population migration is occurring to affordable Southern and Southwestern states where economic growth is outpacing Northern regions,” says Doug Ressler, Yardi Matrix senior analyst.

2. Why Millennials aren’t buying homes — yet

The national homeownership rate has hovered just above a 50-year low recorded in July 2016. The lack of Millennials in the marketplace has been the subject of much media fodder, with real estate experts often citing this as a chief cause of the declining homeownership rate. But many Millennials are besieged by student loan debt and face an economy where wage growth is lagging behind rising rents and home prices.

As a result, many Millennials are getting a little monthly help from the Bank of Mom and Dad, which could be good for the housing market in the long run.

“The thousands of dollars per year parents contribute to their children’s rent allows millennials to live in apartments they wouldn’t be able to afford, pay off student loans quicker or save for a downpayment,” says the listing site Apartment List.

Beyond income, a household’s “stage of life” (ie: if households are established in the workforce or married and planning a family) is a major factor in determining whether or not to buy a home. And many Millennials are now aging into their prime homebuying years, settling down to start families and could be looking to buy.

“Whether people buy a home or rent is dominated by life stages – but what they can afford and save for is determined by income,” says Zillow in a recent study it released on life stages and homeownership.

3. Changes in the tax laws

The Tax Cuts and Jobs Act made many changes to tax laws. Among the most significant revisions impacting housing were reducing the cap on the mortgage interest deduction from $1 million to $750,000 and capping deductions for state and local taxes (including property taxes) at $10,000. Also, under the new law, standardized deductions have been doubled so fewer homeowners are now likely to itemize their filings — somewhat diminishing the long-standing tax benefits of owning a home.

While some homeowners may see a lower tax bill under the new law, the reduced financial benefits of homeownership may deter some buyers — especially in pricier markets.

“While the final impact of the new tax code on the housing market remains to be seen, the changes represent a significant scaling back of one the primary ways in which the government promotes homeownership,” says Apartment List in a recent study on how much the new code could cost homeowners.

4. The return of home flipping

Home flipping activity is on the rise. It reached a peak in 2005, just prior to the housing crash but dropped significantly during the recovery. Over the last couple of years, the number of homes being flipped has topped 200,000 for the first time in a decade.

But while the number of homes being flipped annually on the rise, the practice itself appears not to be repeating its reckless pre-crisis past. Over the last two years, returns on house flipping have been averaging over 50 percent, compared to an average of 31 percent between 2004 and 2006 (the last time the number of flipped homes exceeded 200,000).

“The surge in home flipping in the last three years is built on a more fundamentally sound foundation than the flipping frenzy that we witnessed a little more than a decade ago,” says Daren Blomquist, senior vice president at ATTOM Data Solutions.

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