Just like that, another year has gone by, well, almost. There are still a few days left and anything can happen.
In the meantime, I present my latest installment of real estate and mortgage predictions for the year 2018, which I hope will be a fantastic one for all.
As always, you can see my prior predictions to see how well I did in the past. Here are the ones from 2017 and 2016. You can search my site for even older ones if you’ve got nothing but time on your hands.
Speaking of 2017, I think I did alright, though I was slightly wrong about mortgage rates and missed the mark on the FHA premium cut, though that one was a bit of a curve ball.
Anyway, let’s forget about the past and look ahead to the future.
1. Mortgage rates will rise moderately
I always like to start with the mortgage rate prediction first since it tends to be the most interesting (and the most in demand).
A couple weeks ago, I penned my 2018 mortgage rate forecast post, which is a compilation of several prominent real estate and mortgage groups’ predictions.
I’m going to go with Freddie Mac in 2018 and bank on a slow rise throughout the year that ends with the 30-year fixed mortgage close to 4.5%, up from the current 4% or so.
It’s probably not enough to dent anyone’s homeownership dreams, though if home prices rise as well, and you can’t get a tax write-off for mortgage interest, it won’t be easy to swallow.
It’ll be just one more thing that leads to decreasing affordability.
2. Home prices will continue to rise
Speaking of affordability, don’t expect home prices to go down because mortgage rates go up. Or to drop just because they’re outpacing wage growth handily. Even the tax bill likely won’t have any nasty consequences, despite what interested parties may claim.
There are still plenty of people with money who desire to own a home, and haven’t yet gotten around to it. Not just aging Millennials, but also Generation Z, many of whom were born in the mid-1990s and now starting families.
At the same time, there are still very few homes for sale, a recipe for higher home prices, even if they’ve reached new nominal highs beyond the previous home price peak.
3. Inventory will remain abysmal
There’s just no getting around this one, at least not yet. With home building still below normal levels, first-time home buyers lacking down payment funds, move-up buyers stuck because of limited equity, and retirees perhaps shocked at today’s asking prices, no one seems to be going anywhere.
There’s also the lock-in effect of low mortgage rates, which prevents people from moving. Though they’re still pretty cheap and shouldn’t be the sole reason to stay put.
In any case, good luck finding a wide selection of properties to choose from in 2018. It’ll look much like previous years, except with even higher asking prices! Fun for home shoppers!
4. Loan volume will drop and layoffs will rise
That lack of home purchase activity, coupled with a cooling mortgage refinance market, will sadly result in some more shops closing and additional layoffs. This year, we saw Capital One quit mortgages and I wouldn’t be surprised to see others in 2018.
The mortgage market is getting more and more competitive with the emergence of many new fintech players, which is also eliminating the need for certain positions, including loan officers in some cases.
Together, this will displace some workers. We may also see the end to many of the loss mitigation jobs tied to the mortgage crisis now that we’re more or less out of the woods.
The silver lining to lower loan volume is perhaps lower mortgage rates, as the full benefit might be passed onto consumers to draw in business.
5. The suburbs will be cool again
Okay, maybe they won’t be cool, but they’re going to get a lot more popular again. While there has been talk of cities becoming more and more centralized and saturated, it hasn’t happened yet.
And the cheapest properties tend to be in the city outskirts, namely, the Burbs. There’s nothing wrong with the suburbs, other than perhaps the commute and the abundance of chain restaurants.
But for those looking for more space and/or to start a family, it’s not a bad place to be. Ideally, you’ll be able to afford more house in the suburbs, though don’t be surprised if it’s highly competitive there as well…and a fixer upper to boot.
6. Cash out refis will increase
Now some good news. The higher home prices combined with the low mortgage rates and the many years of paying down the mortgage will result in a lot of home equity for a lot of existing homeowners.
This will allow folks to pull some cash out of their homes while still obtaining a low mortgage rate, thanks to the continued favorable rate environment.
And they can maintain favorable tax treatment on the refinanced mortgage in many cases.
7. Bye bye HELOCs
The tax bill effectively wipes out home equity loans and home equity lines of credit (HELOC)s because the interest will no longer be deductible in 2018.
That rule, coupled with an expected four prime rate increases next year, basically spells disaster for HELOCs, which were expected to surge in popularity over the next few years.
This explains why cash out refis will get an extra boost so long as mortgage rates remain low.
Update: There was some confusion about the deductibility of HELOCs, and it turns out they will remain tax deductible as long as the proceeds are used to purchase, build, or improve the taxpayer’s property that secures the loan. Of course, with a higher standard deduction, this may still benefit fewer taxpayers.
8. Homeowners will pay off their mortgages faster
Those who don’t tap their equity will likely pay off their mortgages earlier than scheduled because of the reduced tax benefit.
You’ll still be able to deduct interest on up to $750,000 in mortgage debt for loans taken out in 2018, down from $1 million currently, but the standard deduction is going up, thereby eliminating the benefit of itemizing deductions for many homeowners.
I think the mindset in 2018 will be to pay down the mortgage faster because of the lack of a tax benefit, even if there are better places to park your money. We might even see more 15-year fixed mortgages, especially with the wealthier cohort.
9. Mortgages will get riskier
That being said, I do think we’ll see more adjustable-rate mortgages in 2018 as well, along with more low-down payment and no-down payment mortgages. Ultimately, if people don’t have the means to buy homes at today’s prices, financing will bend to make it so.
That will add risk to the housing market, especially for those who are buying closer and closer to what may be the eventual top. But today’s mortgages, even if they become a bit riskier, are nowhere close to what we saw a decade ago. And that’s a very good thing.
10. There won’t be a housing bust in 2018
I didn’t even like writing that, but I still believe this housing market has many more good years ahead of it.
First, home prices, while much higher than they were a few years, are still well below the prior peak when adjusted for inflation. Yes, it’s not 2006 anymore and everything (including housing) is more expensive.
Second, the mortgages individuals are taking out are basically pristine, so it’s not like we have to worry about resetting ARMs and exploding option ARMs. Basically, it’s a bunch of people with 30-year fixed mortgages at sub-4%. Why would they risk losing those?
Finally, the desire to own a home persists. It’s not just about the investment, and even if prices are steep, home purchases will happen. And inventory constraints will ensure that the bottom doesn’t fall out in the process.
Bonus: The real estate and mortgage industry will really get disrupted
Lastly, I think 2018 will usher in a lot more technology to the real estate and mortgage space. We’ve seen plenty this year already, including a new asset report that works sort of like a credit report, and the promise of digital mortgages.
If you combine a credit report with an asset report and an Automated Valuation Model (AVM), or even an appraisal waiver, you get a mortgage much faster, potentially.
And instead of emailing or faxing in documents, or even uploading documents, applicants will soon be able to authorize the sharing of financial data on their smartphones, then sign paperwork digitally along the way.
While this stuff is a novelty today, we may see it become the norm next year.
The sacrosanct real estate agent model is also increasingly under threat, with the likes of Redfin’s 1% commission and startups like Opendoor making inroads.
But we’ve also been told that people still matter, now more than ever, so it should be interesting to see how it all plays out…
Happy New Year!
(photo: Marco Verch)