2017 has been a wonderful year for real estate investors and homeowners in most areas of the USA. With the economy growing strong, the stock market growing tremendously, and the overall optimistic notion within the public, it seems as if the market is imminent to continue climbing to new heights, but is it the case? In this blog post, I will try to investigate the underlying reasons for the tremendous growth of the real estate market in 2017 and prior to that, and try to guesstimate whether the trend should linger into 2018.
So without further ado, here are my real estate predications for 2018:
Will the U.S real estate market continue to thrive in 2018?
The answer to this question depends on the reasons of for which the market has grown so tremendously beforehand. If the same conditions apply, then I see no reason that the growth will halt. If the conditions have worsened, then there might be a reason for concern. So, let me rephrase that.
What caused the real estate market to inflate between 2008 and 2017?
Most importantly, we had the 2008 recession that crashed property prices in the USA through and through. Nowhere was safe from these drastic and sudden falls, but some cities’ prices have absolutely crashed. Since then, the American public and the world has regain confidence in the U.S economy and it reflects in how much the underlying assets have grown.
A graph from Zillow showing the increase in real estate prices over the past 5 years. Zillow is a really remarkable site if you want statistics about the market price.
Another important reason is that the U.S real estate market is a sellers market all the way down to the wire. As gaps between the rich and the poor all over the USA are widening, home ownership is becoming less affordable for young Americans making an average salary, and accordingly – rental yields grow. That makes the market very attractive for those who have money, domestically and abroad. Take the ultra low rates policy into account, and you get a notion of how monsters are created. Additionally, the taxation for foreign investors in the U.S market are favorable. Yes, foreign investor would pay tax on capital gains and they would pay additional tax upon disposal of the property, but in a global perspective – these are taxes that any foreign investor would have to pay almost anywhere in the world.
The last reason (which has its similarities to the aforementioned reasons) is that the U.S economy is going from strength to strength. There is an almost euphoric sense in the air, businesses are doing extremely well, and there is a new 20 something multi-millionaire being born every other week. So, the money is washing the markets. Some of the money is invested into financial instruments, some is indirectly invested in real estate through REITs, and some of it is invested directly in the real estate market. If you take into account that some of the older fashioned investors like brick and mortar assets over “papers” (stocks, ETFs, bonds), you understand there’s a unproportional sum of money being put into the real estate market.
There are a gazillion other reasons beyond what I mentioned, but I feel these are the main market drivers.
Will favorable conditions continue in 2018?
If I was to summarize the previous section of this article, it all boils down to one thing, the USA interest rate. Higher rates mean that there’s a safer investment alternative to real estate. It also means mortgages aren’t as cheap. Additionally, when interest rates are higher, euphoria instantly fades into cautiousness. Other reasons I stated, like the overall strength of the USA economy, or favorable taxation, will continue through 2018, in my opinion, so the only question is the US interest rate.
Up until recently that question could have been answered in a lot of different ways, but now that we know the new Fed Chair is Powell, there is much less uncertainty. Powell is known to support Yellen’s approach of gradual increases over a long period to avoid shocks to the system. In other words, he does not want the stock market to crash or Euphoria to end too sudden, and that means the likeliness the rates will climb to the extent that there would be a safer and better alternative to real estate in 2018 is unlikely.
What do you think?