It’s nearly impossible to discuss the 2018 real estate market forecast without factoring in the Trump Effect. President-elect Donald Trump and his rhetoric, which may evolve into actual policy soon, will impact many aspects of the market in the year (or years) to come.
The Trump administration is likely to usher in several major policies that could significantly change the long-term trajectory of the U.S. real estate market, including changes to immigration policy, tax cuts, and infrastructure spending.
“The housing market in 2018 will be more impacted by politics then we have seen in quite a while,” says Nela Richardson, chief economist for Redfin, a national real estate brokerage. “For the past five or six years, the market has been almost in neutral. But what Trump is promising to do in his administration will affect the homeowner and the home buyer.”
Trump’s tightening of immigration policy, for instance, could harm the housing market in a couple of different ways. Here’s why:
Single-family new construction increased just 9% in 2016, says Richardson. That figure is low, as it has been since the housing bust almost a decade ago. One of the big reasons housing construction hasn’t returned to normal levels, despite increased demand, is labor shortages — a lot of workers left the industry when construction jobs dried up in 2007-2009.
About one in four construction workers are foreign born. Stricter immigration policies from the Trump administration are likely to make the problem worse, according to Redfin, which recently issued its 2018 market analysis.
The takeaway here is that having less new home construction activity impacts the overall number of houses for sale and the availability of affordable starter homes, which ultimately translates into higher prices for first-time home buyers.
But that’s not all, says Richardson. “It’s not only that it cuts off potential home buyers, but a lot of home buyers are immigrants,” notes Richardson. In other words, a tightening in immigration policy could also reduce the number of people seeking to purchase a home.
Trump’s promised tax cuts, meanwhile, are aimed at the wealthy, and thus could potentially result in more housing demand at the higher end of the market, says Richardson.
And as for infrastructure, Trump has talked of increased spending in this sector, but has not offered much detail. Still, the comments he’s already made have led to an uptick in interest rates, says Richardson.
“We don’t know a lot about what that spending will look like. It looks a lot like it will be subsidies for contractors. But right now there’s so much optimism that the stock market is rallying and yields and mortgage rates are going up.”
Higher interest rates essentially make a financed home purchase more expensive overall, so they aren’t great for sellers or buyers. They’re also not good news for blue-collar or middle-income home buyers.
And there’s one last ramification of Trump’s election to consider with regard to the 2018 housing market. Lawrence Yun, chief economist for the National Association of Realtors, expressed concern over comments made by Trump’s pick for Treasury Secretary, Steven Mnuchin, who has discussed potentially changing the mortgage interest deduction.
“That would be a terrible hit to the confidence of home buyers,” says Yun. “It spooks potential buyers when they hear that. A change in the mortgage interest deduction could have a big negative impact… The mortgage interest deduction has been widely popular for most homeowners, and housing wealth has historically been a significant source of middle-class wealth, so that would be a hit to the middle class.”
The Trump Effect is just one part of the overall picture emerging for next year’s housing market. Here are five additional predictions for the coming year.
Continued but Slower Market Growth Due to Affordability Pressures
In America’s largest cities, the available inventory of homes that are considered affordable on a median income has declined for the past four years. And 2018 won’t be much different, according to Redfin.
The real estate brokerage predicts inventory will recover slightly, up 1.7% year over year, after falling about 3.4% in 2016.
Redfin also predicts median home sale prices will increase 5.3% year over year. And finally, existing home sales are forecast to increase 2.8% in 2018, after rising 3.4% in 2016.
2018 Will Be the Fastest Real Estate Market on Record
What makes a real estate market a fast market? The average number of days a home spends on the market before going under contract.
Redfin predicted 2017 would break last year’s record on that front. In 2016, the typical home stayed on the market just 52 days, the shortest time recorded since 2009.
“We’ve had a persistent inventory crisis for two or three years, especially in starter homes, there’s not a lot of those on the market right now,” explains Richardson. “In some markets, such as Seattle or Denver, homes have offers within six days of being listed.” That’s six days on average.
The development of new technologies is also contributing to homes disappearing from the market quickly, by making the entire real estate transaction more quick and efficient.
Mortgage Rates Will Increase, But Not by Much
Experts predict that rates on the 30-year-fixed mortgage will climb to about 4.3% next year.
Already, the 30-year fixed mortgage rate has increased from 3.5% at the end of October to just above 4% following the election, according to Redfin. That rise is being attributed to Wall Street’s optimism toward Trump’s economic proposals, as well as the Federal Reserve’s long-expected interest rate hike earlier this month.
More People Will Have Access to Home Loans – For the Time Being
For those with particularly good credit, here’s a bit of positive news. Some financial institutions have introduced mortgages that require down payments of as little as 1% to 3% of the home’s purchase price, if you have a stellar credit history.
In addition, starting in 2017, the government-sponsored mortgage giants Fannie Mae and Freddie Mac backed bigger mortgages for the first time since 2006. The loan limits insured by these companies increased from $417,000 to $424,100 in most regions of the U.S.
The potential bad news is that the Trump administration is talking about doing away with, or privatizing, Fannie and Freddie, a move that will negatively affect countless home buyers, says Yun.
“Most consumers are unaware of the role of Fannie and Freddie,” he says. “Without them, it will be much more difficult to obtain mortgages.”
An Ongoing Housing Shortage
Perhaps one of the biggest takeaways from the 2018 housing market forecast is the unabated shortage of affordable housing in this country. It’s an issue impacted by nearly all of the other predictions already discussed – construction slow-downs, mortgage rate increases, and more.
Yun, of the National Association of Realtors, says there’s nothing on the horizon in the coming year that will likely bring any relief or improvement to this issue.
“We just don’t have enough homes being built in relation to population growth,” he concludes. “This could lead to some social discontent, because overall we will continue to face this housing shortage while new home building remains sluggish.”