The spring home-buying season is underway, but the landscape has changed a lot from a year ago. Congress has curtailed tax incentives to purchase a home, and mortgage rates and home prices are up. Yet for most folks with a stable job buying a home is still better than renting.
The new tax law doubles the standard deduction to $24,000 for couples and caps their deductions for state and local taxes at $10,000. Those combine to greatly reduce the tax incentive to own a home – the share of homeowners who will itemize deductions and list mortgage interest and property taxes is estimated to fall from 44 percent to 14 percent.
Economists estimate this will reduce purchase offers enough to lower median housing prices by about 4 percent in more expensive cities but that has yet to become apparent in the data.
These changes in the tax laws were in focus by December and we now have resale pricing data available through February. In the top 20 metro areas – and in particular in San Francisco, Los Angeles, San Diego and New York City – year over year price increases were about the same or greater.
Most homebuyers have more disposable income to pay mortgages. In their take home pay, a higher standard deduction compensates them for not taking interest and property tax deductions, and lower rates overall actually boost most taxpayers’ buying power.
In hot markets like New York, foreign buyers, who for a variety of reasons pay cash and are simply parking wealth in the United States, have played a big role in elevating prices. U.S. personal income tax laws have few consequences for that behavior.
The Freddie Mac average for a 30-year fixed-rate mortgage is currently about 4.6 percent – up from about 4 percent a year ago – and this significantly affects affordability. For a $300,000 mortgage, that adds about $150 to monthly payments, but landlords are paying more to finance apartment buildings too and that gets factored into rents.
Whether it pays to own a home still comes down to how long you can reasonably expect to stay in the house, because closing costs, Realtors’ fees, and the like significantly raise the initial cost of owning a home – even if you can roll these costs into the mortgage balance to stretch those out.
Employing a calculator on Trulia website, I examined the buying vs. renting tradeoff for the Washington metro areas with a 30-year mortgage, a 4.6 percent interest rate and 20 percent down payment. The formula also factors in higher utility costs associated with homeownership, and expected inflation and rent increases. If the home is occupied for at least four or five years, owning beats renting even without the mortgage interest deductions.
Five years is not a terribly long planning horizon. With a strong job market, most folks can assess whether they will continue pursuing their career near the city where they are currently working, seek better career opportunities elsewhere or look to move closer to families and other amenities. Generally, people are relocating less than in past decades.
Families could instead invest their down payments in stocks, which at first glance appear to be the better bet. From 2000 to 2017, equities as measured by the S&P 500 were up an average of 5.3 percent annually, whereas homes appreciated 3.9 percent.
Those figures don’t consider that the cash flow savings homeowners realize over renters can be invested in an IRA or an ordinary stock account. And homeowners will have their full equity working for them, as opposed to just their down payments. Those are really the most compelling financial reasons – when you rent for 10 or 20 years, you mostly have a nice pile of rent receipts to show for your hard-earned cash.
Also, homeowners enjoy more flexibility – they can modify and add to their homes to fit the circumstances of their families and personal preferences – and stability – they don’t have to fret about a landlord selling to a new owner who might want to repurpose the building.
Owning a home in a good neighborhood – not necessarily a rich area but one that is stable and has good employers within commuting distance – has proven one of the most reliable ways for ordinary folks to save and invest.
Copyright © 2018 News World Communications, Inc., Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.