The State of the Union: What Role Does Housing Play?
The U.S. enjoyed the strongest housing market in a decade last year. But in a speech full of economic accolades, President Trump missed an opportunity for a pat on the back. Housing was not mentioned once in his first State of the Union address.
Here are three ways housing helped the economy last year:
1. Unprecedented wealth for homeowners
Homeowners enjoyed record-high home equity in 2017 thanks to strong home price growth and low interest rates. U.S. homeowners were able to withdraw nearly $54 billion dollars in the form of cash-out mortgages, second liens and home equity lines of credit. Home equity helped support consumer spending, a key driver of economic growth last year.
2. A rising homeownership rate
More homeowners are now benefiting from this price appreciation as ownership has finally started to show perceptible increases from historical lows. In the last three months of 2017 the homeownership rate rose to 64.2 percent from 63.7 percent in the same period a year earlier. Even more good news, the elusive millennial first-time buyer showed up late last year. The homeownership rate for millennial households rose to 36 percent at the end of 2017 from 34.7 percent a year earlier.
3. Contribution to the bottom line
Housing‘s path has been rocky over the past decade. However, in recent years real estate has been a stable contributor to the U.S. economy. New construction accounts for about 3 percent of our economy. Housing services from existing homes add another 12 percent. Housing finished the year on strong footing in 2017. Residential investment grew by 11 percent in the fourth quarter compared to a year earlier, a sign of a healthy housing market that adds to economic growth.
In last night’s address President Trump also outlined his administration’s major policy initiatives.
Here are three ways we think White House policy will affect the housing market this year:
The Good: Infrastructure Spending
Despite strong homebuyer demand, new construction continues to lag the 50-year post with an average of 1.5 million new homes started this year. Lack of supply and high demand means many buyers are battling rapidly growing prices. Median sale prices were up 6.8 percent in 2017 from a year earlier. In fast-growing metros like Seattle, San Jose, Denver and Orlando, home prices surged by double digits.
Buyers are having to move farther from job centers to afford a home. Public investment, particularly in transit, is key to connecting farflung but affordable suburbs to urban job centers.
The Bad: Restrictions on Immigration
President Trump discussed three policy changes to immigration: a path to citizenship for undocumented immigrants under the DACA program, an end to the visa lottery, and exchanging a preference for extended family with a merit-based system. Though we applaud amnesty for Dreamers, overall we view the Trump Administration’s proposed policy as more restrictive than current practice and potentially detrimental to the health of the housing market.
Restrictive immigration policies would cut short housing’s recovery because immigration fuels home demand. Immigrants compose over a third of household growth and have been a key source of population increases in rural areas where domestic population has declined. In a 2017 study of 353 cities we showed a high immigrant population is highly correlated with housing wealth.
The Unknown: Tax Reform
A key pillar of President Trump’s economic plan is tax cuts. Right now we view the effect of tax changes on housing as mixed. On the one hand, middle-class families should see some money from the cut this year. At the same time homebuyers in high-tax states will no longer be able to fully deduct state and local taxes.This could lead prices to stagnate or even decline in high-tax states like New York, New Jersey, Illinois and California. It’s too soon to tell what the effect of the Republican tax plan will be on the 2018 market.
President Trump stated in his State of the Union “There has never been a better time to start living the American dream.” Housing is a crucial part of the American dream that can’t be ignored.
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