"The interesting thing about commerce is that it is pretty simple. The value of anything is what someone is willing to pay for it." So begins Ross Levin in his article for the Star Tribune titled Buying or Selling a House? Get Ready for a Soft Market. In case you can't already tell from the title and opening line, Levin's article makes the case for a slower market in the next few years due to recent changes to a couple primary external factors: rising interest rates and the new tax law. In a nutshell, Levin believes the market will dampen considerably due to a combo of lower number of buyers as well as mismatched home price perceptions between sellers and buyers.
We discussed in our last post the fact that experts don't necessarily agree on what to expect with interest rates in the coming months. But given the recent activity, the public's perception is that rates are on the uptick. Although it may spur lending activity on the front-end of the curve, it will eventually turn into another reason for people to stand on the sidelines. Because who wants to pay thousands of dollars more on interest, right? The real impact, however, comes from the many implications of the new tax law, which effectively reduces buyers' spending power and appetite. First off, the newly-imposed limit on the state tax deduction (which includes property taxes) effects Minnesotans to a greater degree due to our higher tax rates. This only hurts if you itemize, which may not be the case for a large portion of people come next year due to the increased standard deduction. The higher threshold for the standard deduction quite simply mitigates the appeal and importance of all itemized deductions, including mortgage interest. With these breaks/incentives disappearing, many people may find they have a lessened appetite for home ownership. Widespread decreased home-buying appetites means overall less demand... and we get back to our opening. Prices will be naturally and necessarily pushed down. Or so Levin persuades in his article.
Levin makes sure to say that price compression takes time and other factors could still keep prices high and the market hot, such as a strong economy. His point is that it's all about buyers' and sellers' perception of value. And so, even with the external factors described above, Levin concedes that there are circumstances that will still skew that value perception higher: unique properties, low-supply markets, and situations like the "Google" factor (an onslaught of new residents looking for places to live). Now, we know that Google won't be heading to the Twin Cities for its second headquarters. But the Twin Cities has experienced such an extreme shortage of entry-level homes over the past year that we don't expect price compression in that bracket for some time. We may, however, see a more drastic ebb in the flow of upper-bracket home sales due to the aforementioned reasons.
As always, please give us a call (952-258-3100) if you're planning a move!
Photo credit: user renowiggum, morguefile.com