U.S. house prices continue to rise, albeit at a slower pace
Lalaine C. Delmendo | October 24, 2019
Likewise, the Federal Housing Finance Agency's seasonally-adjusted purchase-only U.S. house price index rose 4.76% y-o-y in Q2 2019 (3.12% inflation-adjusted), the lowest growth in almost five years. The FHFA index increased just 0.75% q-o-q during the latest quarter (-0.02% inflation-adjusted), the weakest showing since Q4 2011.
Despite this, 19 of the 20 major U.S. cities continued to experience moderate to minimal house price hikes, according to Standard and Poor's, with Phoenix posting the highest increase of 5.83% during the year to Q2 2019, followed by Las Vegas (5.51%), Tampa (4.71%), Charlotte (4.54%), Atlanta (4.5%), Detroit (4.21%), Boston (3.87%), Minneapolis (3.85%), Cleveland (3.43%), and Denver (3.37%). Minimal house price rises were registered in Washington (2.89%), Miami (2.77%), Dallas (2.66%), Portland (2.36%), Los Angeles (1.57%), Chicago (1.55%), San Diego (1.33%), New York (1.11%) and San Francisco (0.72%). Only Seattle saw a house price decline of 1.32% during the year to Q2 2019.
The Mountain region had the highest house price increases of 5.71% y-o-y in Q2 2019, followed by South Atlantic (5.58%), East North Central (4.89%), West South Central (4.77%), and East South Central (4.66%), according to the FHFA. More modest house price rises were registered in West North Central (4.48%), Pacific (4.33%), New England (3.64%) and Middle Atlantic (3.49%).
The average sales price of new homes sold in the U.S. fell by 1.6% y-o-y in July 2019, to US$388,000, according to the U.S. Census Bureau. In fact, the median sales price of new homes sold fell by 4.8% to US$312,800 over the same period.
For existing homes, the median price was up by 4.3% to US$280,800 in July 2019 from a year earlier, according to the National Association of Realtors (NAR). July's price increase marks the 89th consecutive month of year-over-year gains.
Demand remains robust. During the year to July 2019, new and existing home sales increased by 4.3% and 2.5%, respectively (at seasonally-adjusted annual rate). Construction activity is increasing again, amidst improving homebuilder sentiment buoyed by lower mortgage rates. In August 2019, building permits authorized for new housing units soared 12% y-o-y to a seasonally-adjusted annual rate of 1,419,000 units, according to the US Census Bureau. Likewise, housing starts and completions were up 6.6% and 5%, respectively.
The U.S. housing market is expected to continue to slow in the coming years. NAR projects existing home sales to be flat this year. In addition, the national median existing-home price is forecast to rise by a modest 2.3% in 2019, down from last year's 4.9% price growth.
“The forecast for home sales will be very boring – meaning stable,” said NAR's chief economist Lawrence Yun. “Home price appreciation will slow down – the days of easy price gains are coming to an end – but prices will continue to rise.”
The U.S. economy grew by 3% in 2018 from a year earlier, up from an expansion of 2.2% in 2017 and actually the fastest pace since 2005, according to the U.S. Federal Reserve. However the economy is expected to slow, with projected GDP growth rates of just 2.1% this year, 2% in 2020 and 1.8% in 2021, mainly due to the ongoing trade war, according to the Fed.
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.
US economy to slow, deficit continue to riseThe U.S. economy grew by 3% in 2018 from a year earlier, up from an expansion of 2.2% in 2017 and actually the fastest pace since 2005, according to the U.S. Federal Reserve. The economic growth was mainly fuelled by strong consumer spending, which is supported by rising household wealth, higher house prices, tax cuts, and wage growth.
The economy is expected to slow in the coming years, with projected GDP growth rates of 2.1% this year, 2% in 2020 and 1.8% in 2021, according to the Fed, as the stimulative effects of the tax cuts wane and the federal budget deficit surges, exacerbated by the country’s ongoing trade war with China.
The federal government ran a deficit of about US$779 billion in 2018, up from the previous year’s US$665 billion and the highest level since 2012. As a result, the budget deficit widened to 3.9% of GDP in 2018, up from 3.5% in 2017, 3.2% in 2016 and 2.5% of GDP in 2015. Despite this, the deficit remains far lower than the deficit of 10.1% of GDP recorded in 2009.
The federal budget deficit is projected to increase further this year to US$900 billion and to exceed US$1 trillion beginning in 2022, according to the Congressional Budget Office.
National debt reached almost US$22 trillion in 2018, up from US$20.2 trillion in the previous year, according to the U.S. Treasury. Debt held by the public was US$16.1 trillion and intragovernmental holdings were US$5.87 trillion.
Overall, inflation was estimated at 2.4% last year, the highest level since 2011, according to the IMF.
The labour market remains fundamentally strong, with the nationwide unemployment rate remains at near historic low of 3.7% in August 2019, according to the Bureau of Labor Statistics. The average hourly earnings increased by 3.2% to US$28.11 in August 2019 from a year earlier.