What to expect from the housing market in 2018

Whether you're looking to buy or sell a home in 2018 – or find the perfect rental – it helps to know what you're up against. Experts say timing will be paramount for homebuyers in the coming months, while sellers will likely have an easier time making a successful deal. Meanwhile, renters may find more amenities and negotiating power.

Here’s what to expect from the housing market in 2018.

Buying and Selling

With tight seller's markets being the leading narrative on homebuying over the past few years, Americans are unsure about their ability to buy a home, according to a recent survey of 2,000 adults published by real estate information company Trulia earlier this month. Just 25 percent of respondents believe 2018 will be a better time to buy a home than 2017, according to the report.

These attitudes have been pervasive for years and are beginning to wane on homebuyer enthusiasm. High rents hinder would-be first-time buyers' ability to save, while interest rates are expected to rise and home prices continue to swell in midlevel housing throughout the U.S.

Trulia anticipates the homeownership rate – 63.9 percent as of the third quarter this year, according to the U.S. Census Bureau – to continue the slight upward trend. Interested buyers will have to remain diligent about their research and keep a close eye out for new properties coming on the market. It will also be imperative for buyers to have their financing in order and tap attentive real estate agents to help make an appealing offer on a house, as there will likely be more than one offer on available homes in many markets.

Affordable homes will still be found in the suburbs and outlying neighborhoods of major markets. Millennials have been late to homebuying due to slower income growth than previous generations, points out Michael Fallon, chief investment officer for The Fallon Company, a real estate development and investment company based in Boston. That makes moving to a more affordable neighborhood key, but it's unclear if millennials are slow to embrace the suburbs because they like the convenience of city living or they simply don't feel confident enough to buy. “We haven’t seen that shift to the suburbs yet,” he says. “The contention is maybe that won’t happen.”

For sellers, on the other hand, enthusiasm is up – likely because home prices have continued to climb in recent years. The Trulia survey reports 31 percent of respondents believe 2018 will be an even better year to sell than 2017. Of course, this enthusiasm doesn't translate to more options for buyers: Americans may feel it's a great year to sell their home, but only 6 percent of homeowners currently plan to do so in 2018, according to Trulia. The lack of new inventory spells opportunity for those who choose to sell, but will keep many would-be first-time buyers from jumping into homeownership due to stiff competition.

[Read: 6 Do's and Don'ts for Selling Your First Home.]

New Construction and Development

Since the Great Recession, one of the housing market’s biggest struggles has been a lack of new inventory coming on the market. New construction hasn't kept pace with the growth of U.S. households, and while construction has picked up in recent years, much of the development has been in multifamily buildings – apartments for rent or condominium communities – leaving many prospective homebuyers out in the cold.

“Much of [the new development] centers around trying to create an environment that allows tenants and residents – all users – to have that live, work and play feel,” with a mix of retail, office and residential spaces so residents don't have to travel far, Fallon says.

In addition to more mixed-use communities that blend commercial and residential property, expect the size of individual apartments, condos and houses to get smaller as well. Jeremy Swillinger, a licensed real estate salesperson at Level Group Inc. in New York City, says many new apartments and condos in the city are shrinking to increase profit for developers, and residents so far have been willing to compromise. These smaller footprints are appearing in many other major markets as well.

“Four years ago, developers were making two-bedrooms that were 1,200 square feet, now they’re making them 1,000 square feet,” Swillinger says. “From the buyer’s angle, it’s: ‘It’s not enough square feet for me, but it’ll still work.’ They want to stay in the city.”

[See: The 25 Best Affordable Places to Live in 2017.] 

RELATED: 10 reasons why you should rent a home instead of buy one: 

10 PHOTOS
10 financial reasons to never buy a home
See Gallery
10 financial reasons to never buy a home

1. Your Mortgage Might Exceed Your Rent

One reason for renting is simply that it's cheaper than owning a home. In fact, a recent GOBankingRates study of rent and mortgage costs found it's cheaper to rent in 11 states across the country, plus the District of Columbia.

If you're weighing your options, Barton suggests totaling all rent costs — including the monthly rent payment, deposits, pet fees and service charges — and then comparing that figure to the total mortgage payment on an equivalent property. That will help you determine whether owning a property is really more affordable.

2. Property Taxes Can Be Sky-High

If you live in a state with high property taxes, homeownership could be less affordable than renting — even if average mortgage costs are lower than average rents. There are things every homeowner should know about property taxes.

According to the Tax Foundation, the three states with the highest property tax rates all exceed 2 percent, with New Jersey at 2.35 percent, Illinois at 2.3 percent and New Hampshire at 2.15 percent. At New Jersey's median home value of $315,900, that means paying $7,423 in property taxes.

Keep in mind, though, that renting might not save you completely from high property taxes, since some of those costs likely will be passed on to you by the owner of your unit. Luckily, as a renter, you can often find a cheaper place to live if your landlord bumps your rent too high.

3. You’ll Have to Buy Homeowners Insurance

Homeowners insurance varies depending on what insurance company you use, how much your home is worth and the claims history in your area, among other factors. But whatever your situation, insurance will cost something — and it's just another cost to tack onto your cost of living.

"Homeownership is a long-term financial commitment," said Jose Tijam, a realtor with Grand Avenue Realty & Lending in California. "Your lender requires you to insure your property, and typically you have to pay insurance premiums along with your mortgage payment."

4. The Market Is Volatile

Is the U.S. on the verge of another real estate bubble? Maybe not, but in 2007, many homeowners found out the hard way that housing prices can be variable. Homeowners who bought at the peak in 2006 faced huge losses in 2008.

Home values and costs are variable depending on market fluctuations. That means you might spend more money on your home than it will be worth when you’re ready to sell.

"There’s no guarantee that your home will increase in value over time," said Tijam.

5. Maintenance Can Break Your Budget

Will you be able to pay to replace the furnace if it breaks? Can you afford to repair or replace the roof if it leaks?

Some experts recommend you set aside 1 percent of the purchase price of your home each year to pay for maintenance and repair costs. That amounts to $3,000 every year, if your home cost $300,000. If your home is older, though, you'll want to set aside even more.

Renters, on the other hand, get to call their landlords to handle repairs around the unit. When you sign your lease, you can even ask for a fresh coat of paint, which, for the average home, costs $2,764, according to HomeAdvisor, rather than hiring painters or going the DIY route.

While some of these costs might be passed on to you as a renter, it likely won't be until it's time to renegotiate your lease. But the cost isn’t necessarily the worst part of required homeownership maintenance.

"If you don’t want to do yard work, renovations and upkeep, renting might be the best option for convenience," said Barton.

6. Selling a Home Is Burdensome

Nobody wants to be saddled with an extra mortgage or home they can’t afford. Renting allows the flexibility to leave if your financial or life situation changes. But if you own a home and have to leave for any reason, you’ll end up having to pay for that home — mortgage, taxes, maintenance and all — until you’re able to sell.

If you’re not planning to stay in the same place for more than a few years, you should rent to avoid serious financial problems, said Deb Tomaro, a broker associate with RE/MAX Acclaimed Properties in Bloomington, Ind.

The worst time to buy is when your job or life situation is unstable. For example, Tomaro said she worked with a client who was going through a divorce and was set on buying a new home immediately after moving out of the marital home. An unstable period like that isn’t the time to make such a huge financial decision, she said.

“I know he’s going through a tough time in his life, but he doesn’t have the same excitement about the home-buying process that most people have, and that is disappointing to me," she said. "That’s usually a sign that it’s not quite the right time to buy."

hand holding drawing house, blue arrow and dollars

8. Your Down Payment Could Earn More Elsewhere

Historically, buying a home isn’t the best performing investment for your hard-earned cash, appreciating at only 3 percent per year. On the other hand, since its inception in 1926, the S&P 500 has returned an average of 9.8 percent per year, according to CNBC.

Yes, both stocks and homes can also lose value. But, with stocks, when you sell, at least you can deduct the loss on your tax return. You can’t deduct the loss on the sale of your home if the market tanks.

9. A Mortgage Might Not Lower Your Taxes

Mortgage interest only reduces your taxable income rather than your tax bill, so the amount you save depends on your marginal tax rate. For example, if you fall in the 25 percent tax bracket, you’ll save 25 cents in taxes for every dollar you pay in interest. Plus, to claim the mortgage interest deduction, you must itemize your deductions. This means you must give up the standard deduction, which is $6,350 for singles, $9,350 for heads of household, and $12,700 for couples filing jointly. Other itemized deductions include state and local income taxes, real estate taxes and charitable contributions. So, your mortgage interest deduction only reduces your tax bill to the extent that your itemized deductions exceed your standard deduction.

10. You Might Not Be Able to Move

If you need to move for any reason, whether your company relocated you or you just found another house or neighborhood you like more, expect to pay a 5 percent or 6 percent commission to the real estate agents, plus potentially chipping in for closing costs, depending on your market. For example, if you have to sell your $200,000 home, even if you can get full asking price, $12,000 plus closing costs will be deducted, which could easily offset any short-term savings of renting. Plus, if you are offered a dream job — or even just a better opportunity — in another city, you might have to turn down the opportunity if you are tied to a house you can't sell.

HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE

 

Renting

If more first-time buyers don't embrace the suburbs, the share of renters versus homeowners in the U.S. will continue to grow in 2018. New construction following the recession has largely focused on meeting demand for rental options, and major cities in particular are beginning to experience some relief in rental rates – and even incentives for renters – with the completion of many new properties.

“If you’re a renter, there are options – there’s incentives, there’s free months’ rent. You have the pick of the litter, currently,” Swillinger says.

You won't see rental rates in a luxury buildings suddenly dropping to midlevel prices, but you can expect a bit more power when it comes to negotiating your lease. Especially if you’re looking at a neighborhood where more than one new building is beginning to lease to tenants, leasing agents will have to up the ante to attract tenants.

And if more consumers opt to purchase a home in 2018, renters will have even more bargaining power – not always in the rent itself, but with incentives like free rent for a month or two, free parking spaces or waived amenities fees.

[See: 8 Apartment Amenities You Didn't Know You Needed.]

Tax Changes for Homeowners

Residents in big coastal markets like New York and Los Angeles may see more change coming their way with tax reform, which has tentatively passed both the House and Senate. (Congress is working to reconcile the differences between the two forms of the bill to pass it into law.)

Currently, interest can be deducted from federal taxes on mortgage debt of up to $1 million. The bill that passed in the Senate keeps the deduction as is but removes the deduction for equity debt. The House reduced the maximum deductible debt to $500,000. Both cap state and local property tax deductions at $10,000.

Until the new tax law passes, it remains up in the air how much homeownership will be affected. However, experts agree that any of the proposed changes would have the biggest effect on coastal markets – particularly in New England – where property taxes are highest, while the middle of the country will be largely unaffected.

If you're buying a house, don't make these mistakes that could derail a sale or leave you with a lemon.

“The tax plan, in whatever form it passes, will predominantly cool the expensive coastal markets, but the rest of the country will be relatively unaffected,” McLaughlin says. “Just because most homeowners actually do not take the mortgage interest deduction because their mortgage isn’t high enough to justify itemizing.”

Residents in states like New Jersey or New York, which have high property taxes compared to most of the U.S., may want to take a closer look at a potential home purchase and whether the price is still worth it, explains Jeffrey Citron, a real estate expert and co-managing partner for the law firm Davidoff Hutcher & Citron LLP in New York City.

“People are going to be looking at homes, particularly the very high-priced homes, and sitting back and saying, ‘Wait a second, am I really going to pay $3 million for a home in Scarsdale and pay these school taxes if they’re not deductible?’” he says.

Tax reform isn’t expected to have a profound impact on homeownership in the long run, however, at least not on its own. Still, it could lead to some minor changes in the housing market.

“It doesn’t mean that the fundamental benefits of homeownership are changing under a Trump administration, but just that uncertainty typically causes people to hesitate rather than act,” McLaughlin says.

Read Full Story