Boom continues despite pandemic
Lalaine C. Delmendo | January 19, 2022
The S&P/Case-Shiller seasonally-adjusted national home price index rose by an amazing 19.7% during the year to July 2021 (13.61% inflation-adjusted), a sharp acceleration from the previous year's 4.85% growth and the biggest y-o-y increase ever recorded. This is supported by figures released by the Federal Housing Finance Agency, which showed that its seasonally-adjusted purchase-only U.S. house price index rose by 19.17% y-o-y in July 2021 (13.11% inflation-adjusted), sharply up from the prior year's 6.92% growth and also the highest annual growth on record.
House prices continue to rise strongly in all of the country's 20 major cities, according to Standard and Poor's, with Phoenix posting the highest increase of 32.41% y-o-y in July 2021, followed by San Diego (27.79%), Seattle (25.5%), Tampa (24.41%), Dallas (23.66%), Las Vegas (22.45%), Miami (22.23%), San Francisco (21.98%), Denver (21.31%), and Charlotte (20.89%). Strong house price rises were also seen in Portland (19.54%), Los Angeles (19.12%), Boston (18.73%), Atlanta (18.48%), New York (17.86%), Cleveland (16.23%), Detroit (16.12%), Washington (15.84%), Minneapolis (14.56%), and Chicago (13.32%).
The Mountain region had the highest house price increases of 25.57% y-o-y in July 2021, followed by Pacific (22%), New England (20.84%), and South Atlantic (20.16%), according to FHFA. Strong house price rises were also registered in the East South Central (18.29%), Middle Atlantic (17.99%), West South Central (17.68%), East North Central (16.2%), and West North Central (15.55%).
The median sales price of new homes sold soared 20.1% y-o-y in August 2021, to US$390,900, according to the U.S. Census Bureau. For existing homes, the median price was up by 14.9% to US$356,700 in August 2021 from a year earlier, according to the National Association of Realtors (NAR).
However limited supply is now restricting sales. Existing home sales fell slightly by 1.5% y-o-y to a seasonally adjusted annual rate of 5.88 million units in August 2021, according to figures from NAR. Likewise, new homes sold fell by 24.3% y-o-y to a seasonally-adjusted annual rate of 740,000 units in August 2021, according to the U.S. Census Bureau.
“Home price appreciation continues to escalate as millennials entering their prime home buying years, renters looking to escape skyrocketing rents and deep pocketed investors drive demand,” said Frank Martell, President and CEO of CoreLogic. “On the supply side, it is also the result of chronic under building, especially of affordable stock. This lack of supply is unlikely to be resolved over the next 5 to 10 years without more aggressive incentives for builders to add new units.”
The total number of existing homes available for sale fell by 13.4% y-o-y to 1.29 million units in August 2021, according to NAR. Existing homes inventory was only at 2.6 months supply, down from 3 months a year earlier and from 4 months supply two years ago.
U.S. homebuilder sentiment stood at 76 in September 2021, up slightly from 75 in the previous month, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). A reading of 50 is the midpoint between positive and negative. Sentiment stood at 83 in September 2020 and reached a record high of 90 in November. It then dropped dramatically in the following months, as lumber prices surged and supply chain disruptions hampered construction activity.
The U.S. Fed recently upgraded its 2021 economic growth forecast to 7%, from its earlier estimate of a 6.5% growth, amidst accelerated vaccine distribution and new government stimulus efforts. Last year, the U.S. economy contracted by 3.5% due to the COVID-19 pandemic, the biggest decline since the demobilization from World War II in 1946. The unemployment rate fell to 5.2% in August 2021, sharply down from 8.4% a year earlier and from a peak of 14.8% in April 2020, according to the U.S. Bureau of Labor Statistics. But it remains higher than the average unemployment rate of 4.4% from 2015 to 2019.
Good yields on studios in New York
Manhattan property has held up well through the crisis and beyond.
How much will you earn? Studio apartments will earn relatively more than one-bedroom apartments (in terms of return-on-investment), and those in turn will earn relatively more than two-bedroom houses, etcetera. To earn higher returns, buy smaller units.
- a studio apartment can rent for around $2,700 per month, earning a rental yield of around 7%
- a 1-bedroom apartment can rent for around $3,500 per month, earning a rental yield of around 4.4%
- Larger units earn proportionately lower returns. A 3-bedroom apartment is likely to earn a rental yield of around 2.4%
Round-trip transaction costs are moderate for buyers of U.S. residential property. See our U.S. residential property transaction costs analysis.
The complicated U.S. tax system
Rental Income: Rental income is categorized as either Effectively Connected Income, wherein it is taxed at progressive federal tax rates, or Fixed Determinable Annual Periodical income, wherein it is taxed at 30% withheld by the tenant.
States also levy income taxes at varying rates.
Capital Gains: Capital gains tax for properties held for more than a year is 5%; otherwise the tax is 15%.
Inheritance: Federal estate tax is progressive with rates at 18% to 45% and an exemption of up to US$2,000,000. A Generation-Skipping Transfer Tax is also being levied on transfers to beneficiaries who are more than one generation younger than the transferor.
Residents: Resident foreigners, like U.S. citizens, are taxed on their worldwide income.
U.S. buying costs range from low to moderate
Roundtrip transaction cost is around 9% to 11%. Significant costs include the 6% real estate broker's fee and real property transfer tax, at around 1.425% in New York City. Total costs for legal fees, title search and insurance, and registration fees range from 1.70% to 3.50%.
U.S. housing law is pro-tenant
Strong anti-discrimination laws make the US slightly pro-tenant.
Rent Control: There are subtle rent control laws in 5 states; however their laws also have provisions to give landlords a fair return of investment.
Tenant Security: It is advisable for landlords to write a report citing all the allowable reasons when declining a prospective tenant. Tenants can also charge landlords with intentional infliction of emotional distress to fend off eviction.
Recovering economy, falling unemploymentThe U.S. Fed recently upgraded its 2021 economic growth forecast to 7%, from its earlier projection of a 6.5% growth last March. The U.S. economy contracted by 3.5% during 2020, in contrast to an annual growth of 2.2% in 2019 and the biggest decline since the demobilization from World War II in 1946, as the country was ravaged by the global pandemic last year.
The federal budget deficit is projected at about US$3 trillion in 2021, slightly down from US$3.13 trillion in 2020 but more than triple the shortfall recorded in 2019, mainly driven by the government’s massive spending and stimulus aids on pandemic relief, according to the Congressional Budget Office (CBO). As a percentage of GDP, the deficit is expected to fall to slightly to 13.4% this year, from a record high of 14.9% in 2020.
The federal debt will reach 103% of GDP in 2021, from 100% of GDP in 2020, according to the CBO. Such a fiscal imbalance has not been seen in the U.S. since the end of World War II.
Nationwide inflation eased to 5.3% in August 2021 from a 13-year high of 5.4% in June and July, but it is still far higher than the Fed’s target of 2%. The unusually high inflation is mainly due to widespread shortages of labor and business supplies.
In August 2021, the unemployment rate dropped to 5.2%, sharply down from 8.4% a year earlier and from a peak of 14.8% in April 2020, according to the U.S. Bureau of Labor Statistics. But it remains higher than the average unemployment rate of 4.4% from 2015 to 2019.