Editor's note: This story was originally featured in the February issue of DS News, out now.
As we go deeper into 2018, it’s safe to say the housing industry is poised for further growth. More first-time homebuyers are reported to be flooding the market and evidence of this is that mortgage applications rose 8.3 percent in the beginning of the new year, according to Mortgage Bankers Association’s (MBA) latest report. Even refinance volume, which was predicted to be in a serious slump in 2017 after a banner year in 2016, seems to now be on an upward trajectory. So, why the pessimistic headline?
Headlines like this seem to be all over the place—from the National Association of Realtors (NAR), to the National Association of Home Builders, to the MBA, and many more. Loud concerns have been voiced over the future of housing and homeownership. Of course, much of that conversation is the result of the latest tax reform law—the Tax Cuts and Jobs Act—and how it will affect housing.
Some say the new tax laws could cause the housing market to cool and home values to drop. This is an already toned-down reaction from when tax legislation was first introduced. An earlier version of the bill prompted NAR to publish a detailed state-by-state analysis that estimated all 50 states will experience drops in home values.
No doubt, many homeowners are pausing to assess where the chips will fall before they make big home buying and selling moves. For housing and mortgage industry professionals, this is the time to step up into an advisory role to calm clients’ nerves and to offer solutions. Personal political feelings toward the new act aside, an opportunity exists to stay one step ahead of questions customers may have and to ease the cold feet they may experience.
Understanding the Changes
It’s true that the new tax laws will impact housing in a few key ways. Some of the most-discussed changes include:
- Capping of the mortgage interest deduction to $750,000, down from $1,000,000
- Requiring a longer occupancy period (up from two years to five years) to avoid a capital gains tax
- A new cap of $10,000 for combined real estate, local, and state tax deductions for taxpayers who choose to itemize
However, what we need to recognize about tax reform is that it’s not a standalone event that could affect home value but rather one of many factors impacting the larger housing market.
Many factors could trigger falling home prices: interest rate hikes, geopolitical tensions, terrorist attacks, large company layoffs (for example, the GE layoff of 12,000 employees and Wal-Mart closing 63 Sam’s Club stores), an overheated stock market, and signs of a pending correction.
In addition to event-triggered risk factors, the truth is while homeownership is an excellent long-term wealth builder, home prices do not rise in an ascending straight line. Home values in any given market can experience peaks and valleys, historically in seven- to 10-year cycles, according to housing economists.
Even prior to the details of the tax bill being released, there were signs that markets such as Las Vegas, Dallas, and Denver were already slowing down after being on a tear in early 2017. Real estate agents and lenders understand the housing market is unpredictable and homebuyers’ confidence could turn on a dime.
As current home prices continue to rise, it becomes clearer that the longer-term home value outlook may need to be dialed back due to wage growth that is not in keeping up with those increases. The industry could very well expect to see fewer closings when we hit the tipping point of a too-hot market.
Helping Buyers Protect Their Investment
No one has a crystal ball, not even the experts. However, there are new ways for homebuyers to control how they buy homes that safeguard their investments. Lenders know the risk of market fluctuations and try to minimize their exposure—that’s why they ask homeowners to purchase private mortgage insurance to protect the lender’s loan investment in the event a market downturn occurs and the home value declines. Now, homebuyers can protect themselves the same way.
Lenders and homebuyers are becoming more aware that down payment protection will add a layer of much-needed risk reduction. It safeguards a homebuyer’s investment in a new home purchase—the down payment. If the market corrects and they sell their home for less than what they paid, their loss is reimbursed back to them. This is a homebuyer’s version of private mortgage insurance.
Currently, without down payment protection, lenders walk away with the loan amount intact; even if the borrower defaults, private mortgage insurance kicks in. The homeowner is left holding the bag, paying for 100 percent of the loss, or default, and if they are foreclosed, they lose their down payment and damage their credit. In other words, homebuyers pay to protect mortgage lenders’ investment, but their investment is left exposed to market risks. None of this would happen if they have down payment protection, even if the market experiences a downturn after the current highs.
But it is not entirely an altruistic move to think about stepping up to protect homebuyers’ investments. Market uncertainties and risk concerns are two of the reasons millennials have been slow to convert to homebuyers. Without a steady influx of a new generation of homebuyers, our market will shrink. Many young people simply cannot afford a down payment to buy in today’s expensive market, but even among those who can, increasingly many enjoy the flexibility and the reduced risks of not putting all their (nest) eggs in a basket that is being poked by so many forces beyond their control. The paradox is even though a rental home is not in the renter’s name, oftentimes, the renter feels as if they have more control of their own life and their finances by living there. Think about it—they can move and relocate for a new job without having to sell a home, they do not have to worry about losing a big chunk or all of their hard-earned savings if some foreign dictator far, far away suddenly starts a war that could trigger a housing crash. Unlike the industry, they do not have a financial safety net. They may pay for mortgage insurance, but it does nothing to ensure their own financial interest. In the new age of information and self-education, of transparency and accountability, homebuyers are learning what could be at their disposal and what’s missing, which lenders and real estate agents are offering extra value by looking out for their interests, and which ones are not. More homebuyers will soon ask for down payment protection so the industry has to be ready. If you do not offer it, they will find a lender who does.
Predicting the Future of the Market
In good times when demand is high and loans are closing left and right, few people question the status quo and what changes could further empower the homebuyer. But we should ask those questions now. Remember, it really was not that long ago when the real estate market was on a hot streak. Loans—including some of the subprime varieties—were practically writing themselves. It would be nice if we learned our lessons—and more importantly, prove that we care about our customers and want to look out for homebuyers’ interest. It’s their hard-earned savings that power this $31.8 trillion housing industry. It’s our job and responsibility to look out for their families and their down payments.
Many uncertainties are in the news. There are signs that consumer confidence is wavering and homebuying confidence is down, and that was before the new tax bill actually went into effect and the potential of four more interest rate hikes during the next 12 months loomed. It’s time to offer customers new mortgage products that match their new homebuying demand, instead of waiting for them to ask us. This should be done before the next housing correction to prevent the sky from falling.