Very interesting article about the future of our housing market and its impacts on the tax treatment of housing. One of the facts I found most interesting is that only 3 of 4 homeowners — 25% of all taxpayers — claim the Mortgage Interest Deduction (MID). More so, that number is almost equal to those that claim charitable contributions!
Growth in home sales and prices is contributing to a broader improvement in the overall economy, aided in part by current homeownership tax treatment, according to presentations at a residential real estate forum during the Realtors® Midyear Legislative Meetings & Trade Expo.
Lawrence Yun, the NAR chief economist, said a multi-year housing recovery is likely. “Steady job creation and household formation have been helping to unleash a pent-up demand in the housing market,” he said. “Lagging housing starts and a continuing housing shortage mean home prices are primed to rise further, by 13 percent cumulatively in 2013 and 2014, which will add more than $2 trillion to household wealth over this period.”
Existing-home sales continue to improve, although Yun said inventory constraints are preventing stronger growth. After four years of relatively flat activity from 2008 through 2011, existing-home sales rose 9.4 percent to almost 4.3 million in 2012 and are forecast to increase to nearly 5.0 million this year; he projects 5.3 million sales for 2014 and 5.7 million in 2015.
Investment home sales jumped to elevated levels in 2011 and 2012, and are holding up this year, while vacation-home sales slowly recovered in the past two years. “Growth in household wealth will help vacation home purchases moving forward,” Yun said.
Home price growth is likely to moderate with more new home construction. “Double-digit price gains are within reach in 2013 because inventory is bouncing near 13-year lows, but some relief to inventory will occur later in the year,” Yun said. After rising 6.4 percent in 2012, the median existing-home price should increase about 8 percent this year and 5 percent in 2014.
Yun calculates that 51 percent of renters are financially qualified to purchase a home, up from 24 percent in 2005 and 33 percent in 2000, although their credit scores are unknown and not factored. “Just looking at the financial qualifications, this means they're about 8 million more renters with the income necessary to buy a home now than in 2000, but they are choosing not to, or are unable to become a homeowner,” Yun said.
With the financial industry enjoying high profits, Yun hopes it may be ready to dial down the credit stringency. If the average credit scores of approved loans return to normal, about 720 for conventional loans and 660 for FHA loans, the projects home sale could be 15 to 20 percent higher. During the past four years, the average credit score of approved conventional loans has been in the range of 760 to 770.
Mortgage interest rates are expected to rise gradually this year, with the 30-year fixed rate reaching 4.0 percent in the fourth quarter and averaging 4.6 percent in 2014. Housing starts, which remain below the long-term average of 1.5 million per year, are seen at 1.1 million in 2013, up from only 780,000 last year, and are projected to reach nearly 1.4 million in 2014.
Yun doesn’t expect a recession and said the Gross Domestic Product should grow 2.1 percent this year and about 3.0 percent in 2014.
LaVaughn Henry, vice president, and senior regional officer at the Cincinnati branch of the Federal Reserve Bank of Cleveland, noted that all of the housing measures have been showing positive movement. “We are in a solid, sustainable recovery, with an alignment of fundamentals of what makes housing work,” he said. “While lending for residential real estate is increasing, underwriting standards remain tight, thus slowing the rate of recovery.”
The ratio of home prices to rents, considering norms over the past 30 years, indicates that home prices have recovered to a fair value, and builders are responding to higher demand by gradually rebuilding the diminished supply.
Henry noted that housing has always led to economic recovery, but the market is still picking up speed and he hopes it can boost the economy into a stronger recovery. “Growth in the Gross Domestic Product is running at about half speed for this point in the recovery,” he said. Fiscal austerity is a drag on growth in the short term, but it’s important to get control of debt, said, Henry.
“Household wealth continues its recovery to pre-financial crisis levels,” he said. Since the economic crisis, consumers have reduced the ratio of household debt to disposable income, reversing a 30-year trend of rising debt, and the debt service ratio is at a 30-year low.
Foreclosure rates continue to decline across all major loan types, and mortgage delinquency rates also are declining. “Banks are becoming better managers of their credit. Lenders remain reticent in loosening tight underwriting standards on mortgage loans, but are selectively increasing lending in response to growth in demand,” Henry said. “Lenders aren’t quick to change their standards, but they will become less restrictive over time.”
The Federal Reserve’s monetary policy has helped to reduce mortgage interest rates to historic lows. It expects to keep the fed funds rate low as long as unemployment remains above 6.5 percent, the inflation outlook for the next year or two is no more than 2.5 percent, and longer-term inflation expectations continue to be well anchored.
Danielle Hale, the research economist at the National Association of Realtors®, also spoke at the session and addressed homeownership tax policies. “While the U.S. publicly held debt has exceeded 75 percent of the Gross Domestic Product, there are some misconceptions about the mortgage interest deduction that is important to consider when reviewing the tax code,” she said. Approximately three out of four homeowners with a mortgage – a quarter of all taxpayers – claim the MID, which is about the same number of taxpayers who claim charitable contributions.
Almost all first-time home buyers, who are critical to the overall health of the housing industry, finance their purchase. While the MID provides great benefits to owners in the early years of a mortgage, toward the end of a loan the amount of interest paid is so little that the standard deduction becomes a better option.
“At any given time, only half of the homeowners claim the mortgage interest deduction, but over the course of a lifetime we estimate that roughly 70 percent of households than ever own a home will use the MID,” Hale said.
The typical beneficiary of the mortgage interest deduction is under 45 years old, married, has children, and earns less than $200,000.