In just a handful of days, we’ll be celebrating a new year — and we may be operating under a new tax code, one of the biggest wild cards that the economy has seen in some time, in addition to changes at the Federal Reserve and the Consumer Financial Protection Bureau.
What does any of that have to do with your plans for 2018? If you’re a homeowner in the East Bay, then you’ll definitely see some ripple effects; if you’re dreaming of buying, there will also be consequences; if you’re renting a place, the changes taking place will impact you, too. So no matter what your housing situation, it will pay to keep an eye on the trends.
What do you need to know about mortgage rates, housing inventory, the mortgage application process, and other economic factors unfolding in 2018?
Mortgage loan interest rates
For the past 13 months, it’s been more difficult to accurately predict how the market will react, and that includes the housing market. “It used to be easier to look down the road for a 6- or 12-month timeframe and say with greater confidence what was likely to happen,” explains Melissa Milton, a senior mortgage advisor at Commerce Home Mortgage.
It might be more difficult now, but it’s not entirely impossible. The Federal Reserve adjusts the federal funds rate (the overnight bank lending rate) fairly predictably — that’s not the mortgage rate, and mortgage rates don’t necessarily move accordingly, but the federal funds rate does influence prime rates.
Home equity lines of credit (HELOCs) and adjustable-rate mortgage (ARM) rates are directly influenced by the prime rate, so homeowners with a HELOC or an ARM may want to pay attention to the Federal Reserve’s rate behavior.
What will happen to fixed-rate mortgage rates? That’s much less obvious: “The upward pressure we’re going to see on fixed-rate 30-year mortgages (FRMs) is going to be less a result of what the Federal Reserve does and more a function of what the economy does in terms of stocks and the bond market,” Milton explains.
If there are no changes to the tax code, she thinks that 30-year FRM rates are likely to stay between 4 percent and 4.5 percent, where they’ve been for most of this year. A 2018 market forecast by a realtor.com data expert predicts that rates will average 4.6 percent throughout the year and hit 5.0 percent by the end of 2018.
And if there are changes to the tax code? Those will likely have an impact on housing markets that spread beyond mortgage loan rates.
The inventory problem
It’s not a secret that there’s a shortage of homes to buy and rent in the Bay Area — and unfortunately, that’s not likely to change significantly in 2018.
The proposed tax reform would reduce or eliminate state and local taxes (SALT), and property taxes are included in SALT. Mortgage interest write-offs could also disappear, and depending on an individual household’s financial abilities, this effect could range from inconvenient to devastating.
“Here in our Bay Area markets, we have a significant number of buyers who can be categorized as affluent enough that, while they would be unhappy not writing off their mortgage and displeased at not being able to write off their property taxes, they will not decide against buying for all the other big reasons that people buy houses,” notes Milton. “It’s a place to park yourself and your family, to live a life, to build a community, and the financial advantage is always a secondary and important consideration.”
One side effect of fewer households seeking to buy could be a good thing for those who intend to buy no matter what: The unbalanced sellers’ market that’s been prevalent in the area could start to dissipate.
“If next year we have the exact same number of listings but we have 25%-30% fewer buyers who want to buy those houses, the rate of appreciation and the amount of bidding and competition and over-asking-price purchases of homes will begin to settle down,” says Milton. “It will actually help to create a more balanced buying and selling portion of the real estate market if fewer buyers want to come into the market.”
However, there’s a possible flip side to this: Sellers who can’t deduct their property taxes or mortgage interest might be disincentivized to move up, especially in areas where sales values have increased significantly — they simply won’t be able to afford it.
“In some ways the tax bill could help balance the market if buyers leave, but if more sellers decide not to sell for that reason, it’s going to make things even worse in the Bay Area,” Milton explains.
And there’s another effect of fewer buyers in the market: By default, more households will be looking for a place to rent. That’s going to have an effect on the price of rentals in the area, and for those without a rent-controlled unit or those seeking to move, it could mean they have to look outside their preferred areas to find a place they can afford.
What happens to consumer protections?
The Consumer Financial Protection Bureau (CFPB) was established after the Great Recession to oversee new laws that regulated banks, credit unions, and mortgage lenders. Those new consumer protection laws changed the mortgage application process for homebuyers, requiring more rigorous documentation of income and other shifts.
It’s currently unclear who is going to be running the CFPB in 2018 — there’s a legal battle that could take weeks or even months to decide — but it’s likely that the new CFPB head will be less favorable toward these consumer protection regulations.
That said, there may not be much that a new director can do to remove those protections.
“I believe the secondary capital market sees an advantage to having smartly underwritten loans,” notes Milton. “Economic forces might also keep a lot of these smart documentation processes in place. The process of applying for and qualifying for a mortgage, I believe, will stay the same throughout 2018.”
Other economic factors in play
Despite the potential problems that the tax bill could create for homeowners (and aspiring homeowners) in the East Bay, it’s still an attractive place to live — and that means there are some factors in play that will be tough to shift.
“Most of the larger economic forces that have created the particular real estate market that we have here in the Bay Area are still going to be operating in much the same way next year,” Milton predicts. “The tax bill is obviously a wild card. Mortgage rates are not a wild card, and inventory is going to continue to be tight until California decides something different about Prop 13 and/or until people decide they really don’t want to live in the Bay Area anymore.
“All those reasons people want to live here aren’t changing,” she adds. “And you could argue that more people may want to live here if all these other changes are happening around the country.”