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U.S. house price rises continue to accelerate
The S&P/Case-Shiller seasonally-adjusted national home price index rose by 6.21% during the year to November 2017 (3.91% inflation-adjusted), its strongest y-o-y growth since June 2014. This was supported by Federal Housing Finance Agency's seasonally-adjusted purchase-only U.S. house price index, which rose by 6.54% y-o-y in November 2017 (4.24% inflation-adjusted), a slight increase from y-o-y rises of 6.44% in November 2016 and 6% in November 2015.
All 20 major U.S. cities experienced relatively strong house price hikes, according to Standard and Poor's, with Seattle posting the highest increase of 12.71% during the year to November 2017, followed by Las Vegas (10.6%), San Francisco (9.04%), San Diego (7.45%), Los Angeles (7.02%), Tampa (7.02%), and Dallas (7.02%). Strong house price rises were also registered in Detroit (6.98%), Denver (6.94%), Portland (6.94%), Boston (6.26%), Charlotte (5.76%), New York (5.71%), Phoenix (5.54%), Minneapolis (5.41%), Atlanta (5.14%), Cleveland (4.13%), and Miami (4.06%).
Washington and Chicago saw the lowest growth in inflation-adjusted house prices at 3.28% and 3.59%, respectively.
The Mountain region had the highest house price increases of 8.9% y-o-y in November 2017, followed by the Pacific region (8.6%), South Atlantic (6.9%), East North Central (6.3%), West North Central (5.9%), and West South Central region (5.8%), according to the FHFA.
The average sales price of new homes sold in the U.S. rose by about 4.3% y-o-y in December 2017, to US$398,900, according to the U.S. Census Bureau. On the other hand, the median sales price of new homes sold increased by a more modest 2.6% to US$335,400 over the same period.
For existing homes, the median price was up 5.8% to US$246,800 in December 2017 from a year earlier, according to the National Association of Realtors (NAR). December's price increase marks the 70th consecutive month of year-over-year gains.
Demand continues to rise. Sales of new single-family houses rose by 8.4% to 608,000 units in 2017 from the previous year, according to the U.S. Census Bureau. Likewise, existing home sales were up by 1.1% to 5.51 million units in 2017, the highest level since 2006, according to NAR.
U.S. homebuilder sentiment surged to 74 in December 2017, up from 69 a year earlier and the highest level in more than 18 years, 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.
Construction activity remains robust. In 2017, new housing starts rose by 2.4% y-o-y to 1,202,100 units, while completions were up 8.7% to 1,152,300 units, according to the U.S. Census Bureau. Building permits authorized for new housing units rose by 4.7% y-o-y to 1,263,400 units in 2017.
“With low unemployment rates, favorable demographics and a tight supply of existing home inventory, we can expect continued upward movement of the single-family construction sector next year,” said NAHB Chief Economist Robert Dietz.
The U.S. housing market is expected to remain buoyant. NAR projects about 5% increase in the national median existing-home price this year. In addition, new home sales are forecast to increase to 700,000 units this year and existing home sales to rise to 5.7 million units.
The U.S. economy grew by 2.3% in 2017, an acceleration from a 1.5% growth in 2016 but still short of the government's target growth of 3%, according to US Department of Commerce. The economic growth was mainly fuelled by strong consumer spending, which is supported by rising household wealth, the stock market rally, higher house prices, tax cuts, and wage growth. The International Monetary Fund (IMF) recently raised its growth forecast for the world's largest economy from 2.3% to 2.7%, after President Donald Trump signed a landmark tax law (known as the Tax Cuts and Jobs Act or TCJA) considered to be the largest overhaul of the U.S. tax code in over 30 years.
The new tax law includes a massive reduction in the corporate tax rate from 35% to 21%, in an effort to boost economic growth and stimulate business investment. However, the new law also includes provisions such as reduction of the mortgage interest deduction cap, increasing standard deduction, and the restriction of state and local tax deductions that may hurt the housing market.
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.
Modest economic growth, low unemploymentThe U.S. economy grew by 2.3% in 2017, an acceleration from a 1.5% growth in 2016 but still short of the government’s target growth of 3%, according to U.S. Department of Commerce. The economic growth was mainly fuelled by strong consumer spending, which is supported by rising household wealth, stock market rally, higher house prices, tax cuts, and wage growth.
The International Monetary Fund (IMF) recently raised its growth forecast for the world’s largest economy from 2.3% to 2.7%, after President Donald Trump signed a landmark tax law (known as the Tax Cuts and Jobs Act or TCJA) in December 2017 that lowers both corporate tax rate and individual income tax rates, among other provisions. It was considered as the largest overhaul of the U.S. tax code in over 30 years.
“The backdrop at the start of 2018 is encouraging and supports an accelerated pace of U.S. GDP growth,” said Sam Bullard of Wells Fargo.
In January 2018, the nationwide unemployment rate remained at a 17-year low of 4.1%, according to the Bureau of Labor Statistics (BLS). The recent peak year for unemployment was 2010, with 9.6% unemployment.
About 200,000 more jobs were added in January 2018, higher than the 160,000 additional jobs in the previous month.
The U.S. jobs market continues to strengthen and many economists believe that it is already near full employment.
The average hourly earnings increased by 2.9% to US$26.74 in January 2018 from a year earlier, up from a 2.7% rise in December 2017 and its fastest growth since June 2009. This was mainly due to the increases in the minimum wage in 18 U.S. states, as well as the effect of the tax cut.
The federal government ran a deficit of about US$23 billion in December 2017 and annual deficits are now almost US$ 1 trillion. Spending rose by 3% to an all-time high of US$3.98 trillion in 2017, while revenues increased by a slower 1% to almost US$3.32 trillion.
As a result, the budget deficit widened to 3.5% of GDP in 2017, up from 3.2% in 2016 and 2.5% of GDP in 2015, according to the U.S. Treasury. Despite this, the deficit remains far lower than the deficit of 10.1% of GDP recorded in 2009.
Though the deficit is expected to increase further this year due to tax cuts – estimated to add US$1.4 trillion over 10 years to the country’s budget deficit.
National debt has topped US$20trillion and the U.S. Treasury estimates that the country needs to borrow US$441 billion in privately held debt this quarter, the largest sum since 2010.
In December 2017, the nationwide inflation rate stood at 2.1%, from 2.2% in November, 2% in October and 2.2% in September, according to the US Bureau of Labor Statistics. Overall, inflation was estimated at 2.1% last year, the highest level since 2012, according to the IMF.