January 2, 2018
Tax Law Makes Projections Even Harder
It is the first of the year and we have been inundated with projections regarding the economy, interest rates, real estate and more. It is always hard to predict the future and this year is going to be even harder to predict because of a new variable -- the tax law. As we have mentioned previously, the lowering of tax rates is likely to stimulate an already strengthening economy. This should be good news for jobs, retailers and more. The question remains how strong will the economy get and what will the effects be on interest rates, oil prices -- and ultimately inflation. We have already seen rates and oil prices creeping up in anticipation of the action.
When we move to real estate, the prediction game gets even harder. Economists were already predicting continued inventory shortages, more new homes coming on-line and moderating price increases. But the change in the standard and mortgage deductions will certainly have to be factored into the equation. The doubling of the standard deduction means that those purchasing on the lower end of the scale are more likely to not take advantage of the deduction of interest on home loans. Likewise, those who own higher priced homes are less likely to make a move because they would lose part of their present deduction.
Here is the good news. There are four solid economic reasons to own a home and the tax deduction is only one of these four. The home will still serve as a leveraged investment, a forced savings plan and protection against inflation. As a matter of fact, we feel the tax law's effect upon interest rates may be a more important factor in determining the direction of the real estate markets than the tweaks made in the deductions. In this regard, those who feel that rates will ultimately rise because of the economic effects of the law may very well be inclined to purchase now rather than later.
The Markets. Rates rose in the past week, with 30-year fixed rates moving close to the 4.00% level. For the week ending December 28, Freddie Mac announced that 30-year fixed rates rose 3.99% from 3.94% the week before. The average for 15-year loans increased to 3.44%. The average for five-year adjustables rose to 3.47%. A year ago, 30-year fixed rates averaged 4.32%, more than 0.25% higher than today. Attributed to Sean Becketti, chief economist, Freddie Mac -- "As we expected, rates on home loans felt the effect of last week's surge in long-term interest rates in the final, shortened week of 2017. The 30-year fixed rate increased 5 basis points to 3.99 percent in this week's survey. Although this week's survey rate represents a five-month high, 30-year fixed rates are still below the levels we saw at the end of last year and the early part of 2017. Rates on home loans have remained relatively low all year." Note: Rates indicated do not include fees and points and are provided for evidence of trends only. They should not be used for comparison purposes.
Current Indices For Adjustable Rate Mortgages
December 29, 2017
|6-month Treasury Security
|1-year Treasury Security
|3-year Treasury Security
|5-year Treasury Security
|10-year Treasury Security
|| 1.905% (Nov)
|| 1.132% (Nov)
|11th District Cost of Funds
|| 0.737% (Oct)
|| 4.50% (Dec)
| The new tax law brings many changes for individuals and corporations. While some of the individual changes may not appear to be totally positive for home ownership, the net-effect upon housing could very well turn out to be positive. Putting more spending money in the hands of consumers could boost the economy, which would create jobs and more demand for housing.
The new law did not change the benefit of owning and then selling a home as compared to other investments, as the capital gains exclusion for primary residences was not touched. Therefore, while the benefit of tax write-offs may become less important, a home could become an even better investment. In addition to the investment benefit, homes also provide protection against inflation and forced savings plans, while renting provides none of these benefits.
The tax law is designed to put more money in the hands of consumers by lowering the tax rates and increasing the standard deduction. The higher standard deduction will mean that fewer individuals will itemize deductions. The maximum mortgage amount for which interest can be written off has been lowered from one million dollars to $750,000, though this provision does not apply to existing financing in place. Along with the lower maximum loan amount, deductions for state and local income and property taxes are capped at $10,000 starting in 2018 and home equity loan interest is no longer deductible.
Note that the tax law is very new, and the IRS has not issued regulations or instructions to implement the law. This information provided is based only upon what has been published by the media reporting upon the law. We expect many clarifications, and perhaps even technical amendments, to the law in the coming months. We suggest you speak with your accountant for tax advice based upon the new law and for updates as they are issued. If you do not have a relationship with a tax advisor, we would be happy to refer you to one when you have the need.