U.S. housing market gradually cooling
Lalaine C. Delmendo | March 04, 2019
The S&P/Case-Shiller seasonally-adjusted national home price index rose by 5.16% during the year to November 2018 (2.92% inflation-adjusted), a deceleration from the previous year's 6.09% growth and the lowest pace in more than two years. This was supported by Federal Housing Finance Agency's seasonally-adjusted purchase-only U.S. house price index, which rose by 5.76% y-o-y in November 2018 (3.5% inflation-adjusted), lower than the y-o-y rises of 6.72% in November 2017 and 6.37% in November 2016.
Despite this, all 20 major U.S. cities continued to experience house price hikes, according to Standard and Poor's, with Las Vegas posting the highest increase of 12.07% during the year to November 2018, followed by Phoenix (8.1%), Seattle (6.33%), Denver (6.22%), Atlanta (6.2%), Minneapolis (5.77%), Detroit (5.75%), Tampa (5.68%), San Francisco (5.6%), Boston (5.59%), and Charlotte (5.45%). Modest house price rises were registered in Miami (4.96%), Cleveland (4.63%), Los Angeles (4.44%), Portland (4.38%), Dallas (3.96%), New York (3.5%), San Diego (3.35%), Chicago (3.11%) and Washington (2.72%).
The Mountain region had the highest house price increases of 7.44% y-o-y in November 2018, followed by the East South Central (7.32%), South Atlantic (6.68%), East North Central (5.73%), West North Central (5.59%), and New England (5.29%), according to the FHFA
The average sales price of new homes sold in the U.S. rose by just 1.8% y-o-y in November 2018, to US$362,400, according to the U.S. Census Bureau. In fact, the median sales price of new homes sold fell by 11.9% to US$302,400 over the same period.
For existing homes, the median price was up by a modest 2.9% to US$253,600 in December 2018 from a year earlier, according to the National Association of Realtors (NAR). December's price increase marks the 82nd consecutive month of year-over-year gains.
Demand is now falling
Sales of new single-family houses were down 7.7% to a seasonally-adjusted annual rate of 657,000 units in November 2018 from the previous year, according to the US Census Bureau. Likewise, existing home sales fell by 10.3% y-o-y to 4.99 million units in 2018, according to NAR.
Construction activity is weaker. In November 2018, new housing starts fell by 3.6% y-o-y to a seasonally-adjusted annual rate of 1,256,000 units, while completions were down 3.9% to 1,099,000 units, according to the U.S. Census Bureau. Building permits authorized for new housing units rose by a meagre 0.4% y-o-y to 1,328,000 units in November 2018.
U.S. homebuilder sentiment declined to just 54 in December 2018, well below the previous year's level of 74 and actually the lowest reading since May 2015, 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.
“This housing slowdown is an early indicator of economic softening, and it is important that builders manage supply-side costs to keep home prices competitive for buyers at different price points,” said NAHB Chief Economist Robert Dietz.
The U.S. housing market is expected to continue to slow in the coming years. NAR projects only about 1% increase in existing home sales this year to 5.4 million units. In addition, the national median existing-home price is forecast to rise by a modest 3.1% to around US$266,800.
“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.”
US Economic growth is very strong, and corporate taxes have been cut
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. 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.
However the economy is expected to slow, with projected GDP growth rates of 2.3% this year, 2% in 2020 and 1.8% in 2021, mainly due to the ongoing trade war, according to the Fed.
President Donald Trump recently signed a landmark tax law (known as the Tax Cuts and Jobs Act or TCJA), the largest overhaul of the U.S. tax code in over 30 years. Effective January 1, 2018, the law includes a massive reduction of the corporate tax rate from 35% to 21%, to boost economic growth and stimulate business investment. But it also reduces the mortgage interest deduction cap, increases standard deductions, but restricts state and local tax deductions - with uncertain effects on 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.
US economy to slow, deficit continue to riseThe economy is expected to slow in the coming years, with projected GDP growth rates of 2.3% 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.
In January 2019, the nationwide unemployment rate stood at 4%, up from 3.9% in December, 3.7% in November and 3.8% in October 2018, mainly due to the US federal government shutdown from December 22, 2018 to January 25, 2019 – the longest US government shutdown in history, according to the Bureau of Labor Statistics (BLS). Though it is still lower than last year’s 4.1% jobless rate and the recent peak of 9.6% in 2010.
The labour market remains fundamentally strong, with the jobless rate projected to fall again in the coming months. The IMF expects the US unemployment rate to fall to 3.5% this year and to 3.4% in 2020.
The economy added a whopping 304,000 jobs in January 2019, after adding about 2.4 million jobs in 2018 – the strongest pace for hiring in three years.
The average hourly earnings increased by 3.2% to US$27.56 in January 2019 from a year earlier, slightly down from a 3.3% rise in December 2018, according to the BLS.