by Tolbert Rowe

Hopefully everyone has seen a slight increase in their take home pay as a result of the Tax Reform Act of 2017. Although it might be slight for many, it is more money in your hands as opposed to in the Federal government coffers. The real significance of Tax Reform will be seen in early 2019 when returns are being filed. For now, we can only hope that anticipated tax refunds are not replaced with small incremental increases in take home pay. Working class America has come to rely upon a substantial kickback from Uncle Sam at tax time.

Tax Reform should have little impact on most of the housing market, except for areas of high values and high property taxes. JP Morgan Chase estimates that tax reform will shave about 2% off of the annual price increase percentage in high cost areas and in the rest of the market only 1%. So, instead of property values appreciating at a 5% rate, they rise 3% in high cost areas or 4% in the rest of the country. To me, an increase in value is a plus regardless of what the percentage is. After losing as much as 50% of value in the crash 10 years ago that may never be replaced, many homeowners have recovered enough value to be able to finally sell their homes without having to write a check to pay off a mortgage.

Tax Reform is coming at a time when the homeownership rate in America increased to 64.2% in 2017 from 63.7% in 2016, as reported by the Census Bureau. This increase has been fueled by an increase of millennials, those under age 35, purchasing their first home. And, they are not purchasing homes with the hope that the home’s value will increase at double digit rates, allowing them to pocket a large profit.

Since the mortgage meltdown of 2007-2008 when there were increases in the number of purchases by first time home buyers there were incentives to those making the leap to homeownership. Tax credits, lowered interest rates, special programs for specific professions, etc. The difference with last year’s increase in homeownership is that it is a truly market related event, driven by the basic desire of the younger generation to own their own home, as opposed to renting.

The real estate meltdown of 2007-2008 and the resulting 50% or greater loss of value/equity was a grim reality for many families who bought into the idea that “real estate values never go down”. Children of these families saw the devastation wrought when a family experienced the loss of a home and did not want to go through what their parents may have gone through. Within the last two years these prospective buyers have come out of hibernation and are buying houses.

Things are different now. Unemployment is at historic lows. People, regardless of their ages will not make a long term commitment to buy their first home if they are concerned that they may not have a job a year from now. The unemployment rate has slowly declined from a high of 10% in October of 2009 to its current rate of 4.2%; the lowest it has been since December of 2000. In my 32 year lending career I have found that high unemployment is the biggest obstacle to purchasing a home versus renting for first time home buyers, perhaps even more so than prices and interest rates.

We have also seen a shortage of residential rentals, single family and apartments and the cost of renting has in some areas skyrocketed. Just try to find a three bedroom house or apartment to rent for less than $1,200 per month. Many landlords are reluctant to increase rents for long term tenants so that when these tenants move on landlords take advantage of being able to increase rents to new tenants, sometimes by as much as several hundred dollars per month.

Home prices, although higher today than they were two or three years ago, are still reasonable in comparison to what they were at the market peak in 2006-2007. Prices in the early 2000’s were driven strictly by speculators and home buyers who were convinced that real estate values would continue going up. Buyers were not afraid to buy with little or no down payment because equity would magically appear just because they owned it. First time buyers were motivated to “invest” in real estate that would also happen to be their home with the hope that, within a short period of time, they would sell, make a significant profit, and move on to purchase a bigger and better home. The recession that started in 2007 changed all that.

Our real estate market in Caroline County has always been the affordable alternative to adjoining counties like Talbot and Queen Anne’s and the Western Shore. Developers discovered us as a cheaper alternative for those who could not qualify for $600, 000 homes in Annapolis, Baltimore and DC markets in the early 2000’s so they pointed prospective buyers east, across the Bay Bridge. For those willing to commute across the bridge for work, they could buy the same house they saw on the Western Shore here in Caroline County for half the price. If unable to afford homes on the Western Shore, they could drive until they qualified.

Those same houses in subdivisions all over the Mid Shore that originally sold for $325,000 and up in early 2000’s lost half of their value by 2012-2013. These same homes have now appreciated back to 70% to 80% of their original value. Houses that sold at prices very few local people could afford are now being purchased by local families who work in our immediate area, do not commute over the bridge and can afford a home priced in the low to mid $200,000’s.

The biggest problem we have at this time is a lack of inventory of homes for sale. Making this problem worse is that the number of potential buyers is increasing. Because rents have increased so much you can actually buy a home and have a mortgage payment equal to or even less than what you are paying in rent.

And as confidence in their future increases because they are secure in their employment, first time buyers become more in tune with what is important and necessary to be eligible, or qualified for a mortgage. A stable job, good credit history and a proposed mortgage payment that is not much higher than what they are paying in rent is the fundamental basis of successfully qualifying for a mortgage. Having a lot of money in the bank, although very nice is not necessary for several mortgage programs like Rural Development and FHA.

We are very lucky that most of the Eastern Shore is considered a rural area and eligible for 100% Rural Development financing. The other side of the Chesapeake Bay is not quite so lucky. There are very limited areas considered “rural” by Rural Development standards in the metro counties around Baltimore and DC. An added benefit is that sellers can pay most if not all of buyers closing costs so you can actually buy a house with very little if any money out of your pocket; a real benefit for those who qualify for the program.

To summarize, homeownership is on the rise, and the new tax laws will have a very limited impact on the real estate market, especially in areas like ours. Rentals are scarce and when you can find one be prepared for increased rents. People are working, and when people are working they will be confident enough to purchase a home. And finally, if your income is $96,150 for families of one to four people and $126,900 for families of five or more you are “eligible”. Next month we will discuss what is necessary to “qualify for a mortgage”.