One Year into New Presidency, ‘Uncertainty’ Looms in U.S. Housing Market

A year into President Donald Trump’s term, the overall U.S. housing market remains strong. But uncertainty also looms large, experts say, noting effects of the new tax law could bring big changes.

"The most overused phrase in real estate used to be ‘location, location, location,’" said Jonathan Miller, president of the real-estate appraisal firm Miller Samuel. "Now it’s ‘uncertainty.’"

That uncertainty existed at the end of both 2016 and 2017, albeit for different reasons.

Mr. Miller, who is also the author of market reports tracking many major cities and towns around the U.S., said there was a pause in activity at the end of 2017, although the official numbers are not yet available.

"Late 2017 and 2016 were both characterized by a pullback or pause in the market," Mr. Miller said. "In 2016, it was the heated final days of the election. In 2017, there was a pause during the conversation about the new tax bill and what the ramifications for housing would be."

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Once those events were in the rear window, buyers felt more comfortable making deals they had been hesitating to make.

"It’s not so much what the event was, just that it’s over," Mr. Miller said. "Once people can get their arms around it and make calculations, they can re-enter the market."

Mr. Trump’s lack of political experience may continue to hold some potential buyers and sellers back. But short of engaging the U.S. in war or implementing another huge executive change, his agenda isn’t necessarily having an effect on the market, said Andres Carbacho-Burgos, head of the residential real estate team at Moody’s Analytics.

"He is pretty much in line with the Republican Party," he said. "So it’s more a question of what the party will do, rather than put it all on Trump."

And it could be up to two years before the effects of any policy changes made during his administration will be manifest in the U.S. real estate market, Mr. Andres Carbacho-Burgos said.

For now, the market hasn’t seen too much change.

More:2017: A Year of Uncertainty and Record-Breaking Real Estate Deals

Housing remains healthy

In general, the U.S. housing market is healthy, experts said, and has been steadily improving for years.

"There’s still strong demand. We still have dirt-cheap interest rates," said Nela Richardson, the chief economist at Redfin.

There were 1.7% more home sales in 2017 than there were in 2016, the last year of former President Barack Obama’s administration, according to a Redfin report. Prices gained 7% over the year, the report said. This rise is part of an ongoing trend, as the housing market continues to rebound from the recession of the late 2000s.

One thing that remains the same under both presidents is a lack of supply.

"What the housing market had been starved for under President Obama was inventory," Ms. Richardson said. And she doesn’t expect that to change in 2018.

More:2018: Global Luxury Real Estate to Feel Tax Impact

The number of homes for sale declined 14.5% in December, compared to the year before, according to the Redfin report. That makes 27 months in a row of inventory declines; homes sold in December were on the market for an average of 49 days before going into contract, five days fewer than 2016.

The inventory shortage hasn’t affected the high end, or the top 5% of the market. In fact, new construction of high-end housing has outpaced development in other markets, resulting in a lot of options for a smaller pool of buyers.

Sales prices on the high end have slowed, and 2018 could mean more price reductions, experts said. The average sales price for the U.S. luxury market grew to nearly $804,000 in 2016, or 5.14%, according to a report from Realtor.com. The overall market, however, was up 6.9% to $234,851.

On the high-end of the market, Mr. Miller said there’s still too much "aspirational pricing," which is one of the reasons sales are softer for luxury homes than lower-priced homes. Sellers aren’t always willing to part with their homes for less, and it can take a year or two before they are ready.

This could lead to "less sales action or a slower rate of growth as buyers and sellers find an equilibrium for value. This has more impact on the high end of the market, less impact on the lower end. The middle is somewhere in between."

At the end of 2017, Mr. Miller said sellers were starting to understand the need to discount their asking prices. "It took years to get there, and now we have to do it again."

More:U.S. Housing Demand Wilts in the Face of Too Few Listings

The tax bill

Although the tax law is now a done deal, it’s still unclear how far-reaching the ramifications will be.

"We’re still coming to terms with it," Mr. Miller said. "It will have a significant impact on housing...but not a catastrophic one," he predicted.

Initially, it looked like there was a slight increase in transactions after the tax bill was passed. Buyers felt more comfortable making deals they had been hesitating to make.

He added that was from his observations only, as the final numbers on sales are not yet available.

But, Mr. Miller cautioned against assuming that will continue. "I don’t want to rain on anyone’s parade, but it’s really just a release of that demand."

Just the opposite: the new caps on mortgage and state-and-local tax deductions will result in a "modest pullback" early on in the year, Mr. Miller said. That depends on the market, he added. If there’s a limited inventory and a strong demand, that market will be less affected than a soft, flat market, he said.

More:How the New U.S. Tax Law Impacts Property Owners

Mr. Carbacho-Burgos said the effects of the bill may take a while to be clear. "We’re betting on one to two years, as buyers and sellers factor in the greater costs," he said.

Mr. Carbacho-Burgos said he sees the tax overhaul as having a "net negative effect on housing," as "purchasing a home is a much less tax deductible than it used to be."

That’s especially true in regions with high property taxes, as well as valuable housing stock.

"The state-and-local tax deduction is now capped at $10,000," Mr. Carbacho-Burgos said. "In many areas—the Northeast, California, parts of Texas—individuals pay more than that in property tax alone. They will run into those caps."

This will largely affect the upper tiers of the market, he added. But it could also prompt renters to stay in their homes a little longer and force sellers to keep their homes instead of upgrading to larger abodes.

In addition, the new code may lead to "downward pressure on housing prices" in high-cost states, Mr. Miller said. Because of the loss of deductions, homeownership is more expensive in those areas, and sellers may take a hit to compensate buyers.

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On the flip side, low-cost states, like Florida, "are really going to benefit over time," he said. People who were already mulling a move may be more likely to take the plunge into a lower-tax market.

But Mr. Miller doesn’t see a mass migration happening as a result of the tax bill. "People just aren’t going to behave that way," he said.

Ms. Richardson agreed. People, not policies, have the most effect on the market.

"Whether a person buys a house or not doesn’t change under the president," she said. "It’s about life events, a new job, a marriage, having kids."