Happy New Year! We hope you have gained wisdom through your experiences in 2017. We wish for you the full optimism, energy, and momentum that comes with the start of a new year. We are excited and hope we can all aim to do better, live better, and be better this year!
If your dreams and goals this new year involve real estate, we are always ready to assist. Feel free to reach out to us. We enjoy brainstorming with our customers. Take advantage of our market experiences, which are often different than what you read and hear in the national news, and always more relevant at a local level.
So, what’s ahead this new year in our Orlando real estate market?
- The pace of home price appreciation will slow down: Inventory level continues to hover near record low, particularly for the entry-level homes. (For a better understanding of the underlying reasons for the current low inventory, see my article). The low supply and high demand have driven the home prices up in recent years. But the rise in home prices is on average 3 to 4 times faster than the homebuyers’ income, resulting in an affordability problem. It is a problem because as homebuyers try to save money to buy their first home, they often find that the home prices have risen faster than they can save. This decreased affordability will effectively stall the pace of appreciation by decreasing demand. We hear from some buyers that they are frustrated by the lack of choices and have doubts if this is a good time to buy.
- The interest rates defied experts’ predictions for 2017. If interest rate rises with the economy in 2018, it will exacerbate the affordability problem. The homebuyers’ purchasing power will decrease. For every 1% rise in interest rate, the purchasing power (mortgage amount) decreases 10% for the same monthly payment. Currently, the experts predict an average rate of 4.5-5% by 2018 year-end. We will see! Another effect of higher interest rate, is more homeowners may be reluctant to buy a new home at a higher interest rate, since they cannot take their current low rate with them. Fewer sellers means less inventory, this exacerbates the inventory problem.
- Tax law changes have been a wildcard. The new tax regime will fundamentally alter the benefits of homeownership by nullifying some long-held incentives. As of 12/20/2017, the tax reform legislation passed both the House and Senate. I had written an earlier version of this but last-minute changes to the bill included the improvements below. Ultimately, we hope people will continue to believe in the many benefits to homeownership, and look pass the tax reform.
- Capital gains exclusion. In a huge win for current and prospective homeowners, current law is left in place on the capital gains exclusion of $250,000 for an individual and $500,000 for married couples on the sale of a home. Both the House and the Senate had sought to make it much harder to qualify for the exclusion (by requiring owning the home for 5 years instead of 2 to qualify for the exclusion). This would have “trapped” many homeowners in their current home for longer time. Fewer sellers means fewer buyers, and this would have slowed the market.
- Mortgage interest deduction. The maximum mortgage amount for households deducting their mortgage interest has been decreased to $750,000 from the current $1 million limit. The House bill sought a reduction to $500,000. This range of figures won’t affect us much, but other forms of reduction will likely come in the future.
- State and local tax deductions. Both property taxes and state and local income taxes remain deductible, although with a combined limit of $10,000. Both the House and Senate bills sought to eliminate the state and local income tax deduction altogether
- As the home price rise is expected to slow, various investors will exit the market. These are the early investors who have seen handsome price appreciation of their holdings purchased since 2010. They have constituted a large part of the demand in the early recovery years and helped establish the bottom of our market correction. As with any other investment, when the return is slowing, some investors will be selling and taking the profit. There are large institutional portfolios in central Florida, holding thousands of homes. The Yao Team has always worked with smaller investors and investment groups. In the last 2 years, many have exited the market. These sales are orderly and have helped to fill the inventory shortage. The large institutional holdings have the potential to move the market on the downside, but they are making good money as landlords, so we hope this segment will be stable.
We at the Yao Team are fervent believers of the benefits of homeownership and real estate investments. We love real estate not just professionally but also personally. We hope you will consider us as your consultants and your advocates when it’s time for you to buy or sell a home.
Happy New Year!
Yien and The Yao Team