California Centric View
In 2018 the California housing market is going to be much better than some may have thought in 2017. This month begins my 32rd year in the real estate industry and while I may not be an economist I have experienced a few ups and downs over the years as well as two major housing downturns (1990-1994, 2007-2011) and I served as president of the Orange County Association of Realtors in 2007 during the onset of one of the biggest real estate value melt downs ever.
I’d like to point out the most significant factors creating another good year for the California housing market.
Markets Turn Down In Bad Economies, Not Good Ones
We are going to have a strong economic year in California in 2018. California is having robust job gains and the unemployment rate is at the lowest level in four decades; 1979 being the last time it was this low – 4.6%. Since 2012 the California economy has grown faster than that of the U.S. as a whole. Job gains are happening across most industries, technology, educational and health services, leisure, hospitality, business services, manufacturing and construction. All industries are showing gains in employment. With a tight labor market, employees feel their jobs are secure and the possibility of pay increases. They also consume more goods, services and homes, which in turn creates more jobs.
Tax Overhaul, Nothing to Fear
The corporate tax cut to 21% is now in place along with lower individual tax rates and higher child care credits. Business owners and corporate executives make up a large portion of the high-end California home buyers. They will see increases in corporate profits allowing for increased bonuses and more profit distribution to the bottom line. Increased corporate profits should drive the stock market higher thus creating a larger net worth for people. As individual’s retirement plans and 401ks increase in value, the wealth effect increases and homebuyers feel better and are more secure taking the step towards the purchase of a home.
The new lower mortgage interest deduction cap from $1 million to $750,000 is not going to have a lasting affect going into the New Year. The change will cost a homeowner with a mortgage over $750,000 an average of $2,500 to $4,000 a year depending on their tax bracket. That amount would be equal to a 6% increase in monthly principal and interest payments. The wealth effect created in the other areas of the tax bill are easily going to offset this increase. So what’s the problem?
Headwinds to Consider
The two biggest challenges we will see are the Federal Reserve Board may increase interest rates in 2018 and the tax bill limiting property tax and state income tax write offs to $10,000. When interest rates are perceived as going to increase it does move some people to proceed with a purchase to take advantage while rates are still low. California does have the highest tax rate in the nation (are you surprised?). With mid-term elections coming in November there is a chance we could see change in this area, and that’s where it’s most needed.
These statements are just an opinion. California housing has always done well when the economy is in good condition and employment is strong and 2018 is showing evidence of both for this year.
By Michael Caruso
Broker associate Michael Caruso works with The Agency, a real estate company that recently opened an office in Orange County. Reach him at 949 584-2300 / firstname.lastname@example.org