There is already a lot of economic uncertainty in 2018. From changes in the CFPB, to Freddie & Fannie updates, and of course,
nuclear armageddon tax reform. With all of that in mind, how do you plan and budget for the year ahead? I mean, we are all mortgage and title professionals, not professional economists.
So we invited respected economics guru Bill McBride to speak on what he foresees in 2018. Author of the famous economics blog “Calculated Risk,” he has proven himself a macroeconomic savant, predicting both the housing crash and the Great Recession, well before almost anyone did. And he was spot on with his predictions about the bottom in housing prices and the recovery as well. So if you’re going to listen to a macroeconomic expert, we believe he is the best choice.
So how does he think 2018 will play out?
Nothing Too Dramatic
Let’s start with the “soap opera” scenarios.
No he doesn’t think the world’s going to end.
And no, he doesn’t think the new tax plan will usher in a golden age that will last for generations.
Ok, now that we got that out of the way, let’s get into the nitty gritty.
The important thing that Bill reiterated is that he doesn’t see this as a year of extremes. Importantly, he doesn’t see a recession upcoming in 2018. In fact, he sees this as they year we come close to “full capacity” for employment numbers and a year with higher GDP that in previous years.
Well, what does that mean specifically?
Just The Facts Ma’am
How does McBride see the upcoming year unfolding?
1. He predicts growth will be in the mid to high 2% range, with a possibility of it to hit 3% for the first time in years. Why does he see this?
- The tax bill will have an impact on the economy, but most likely not an enormous one
- New home construction should continue to pick up, so more jobs will be added
- Low unemployment means the economy will keep on improving
2. While job creation will slow in 2018, but not due to a bad economy. It will be because of America reaching close to full employment, with unemployment falling to around 3.7%.
3. With unemployment dropping to such low levels, an upward tick of about 3% in pay should occur, as companies will be forced to outbid each other for the best talent available.
“Well, this is all great,” you say. “But we’re mortgage lenders and title agents, what are the predictions for housing specifically?”
Well, it should be… mostly good.
4. The new tax law will have a moderate effect on the economy, but is still a bit of an unknown. As Bill himself stated, “There were several changes to the tax law that will impact housing. The Mortgage Interested Deduction (MID) is now limited to the first $750,000 in mortgage debt. Interest on home equity lines will no longer be deductible. Also, a key change in the new tax law is limiting the deductibility of State and Local Taxes (SALT) and property taxes to $10,000. Many analysts think this will hit certain segments of the housing market in states like New York, New Jersey and California. My sense is the low end of the housing market will be fine. The Mortgage Interest Deduction (MID) will be capped at interest on a mortgage up to $750,000 instead of $1,000,000, so the lower priced markets will not be hit by the reduction in the MID. There might be some additional taxes for these buyers due to the limits on SALT and property taxes, but this should be minor. I also expect the high end of the market to be fine. The high end is already doing well even with the MID capped at $1 million. For these buyers, the bigger impact will be the SALT and property tax limitations, but there will be offsets for these buyers due to the lower rates – and these buyers will likely benefit from the corporate tax cuts. Many of these buyers will also benefit from the changes to the Alternative Minimum Tax (AMT). It is the upper-mid-range in the certain markets that will probably slow. This might be in the $750,000 to $1.5 million price range. These potential buyers probably don’t benefit from the AMT or corporate changes, but they will likely be hit by the SALT and property tax limits. There could also be a change in buyer psychology. We just have to wait and see.”
5. Active inventory will increase in 2018 (inventory will decline seasonally in December and January, but he expects to see inventory up again YoY in December 2018). It has decreased the last 3 years. According to the November NAR report on existing home sales, inventory was down 9.7% YoY in November, and the months-of-supply was at 3.4 months. Bill believes inventory will finally increase because:
- Inventory is historically low (lowest for November since 2000)
- The recent changes to the tax law
6. With a booming housing market and increased inventory, he sees a boost in Residential Investment. Bill sees around 1.25 to 1.3 million in 2018, with new home sales around 650 to 700 thousand. This would be an increase of around 4% to 8% for starts and maybe 6% to 12% for new home sales.
7. Even with active inventory increasing, he does not see housing prices drop, although he does the the rate of acceleration decrease. “Inventories will probably remain low in 2018, although I expect inventories to increase on a YoY basis by December of 2018,” he stated. “Low inventories, and a decent economy suggests further price increases. Perhaps higher mortgage rates will slow price appreciation, and if inventory increases YoY as I expect by December 2018, it seems likely that price appreciation will slow to the low-to-mid single digits.”
8. Finally, he sees the Fed raising rates 3 times this year, but inflation will not be a concern.
In conclusion, Bill has historically been in tune with the macroeconomy (and, if you’re not already doing so, you should check out his blog Calculated Risk). With that, he sees 2018 as a solid year for job and GDP growth, with good housing numbers, but ultimately the tax plan and its effect on the overall economy is an unknown.
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