There are many challenges to the real estate market at this time. First, interest rates have been climbing, mostly due to the Fed setting expectations that they will finally be raising rates in 2018 either three or four times. Second, the “Tax Cuts and Jobs Act” – President Trump’s tax reform plan – takes effect in 2018, and it will reduce the maximum allowable mortgage interest deduction from $1 Million to $750,000. In addition, tax reform also limits the maximum deduction for mortgage interest and personal income taxes to $10,000 annually. This means that mortgages cost home buyers more than they used to, effectively reducing the total purchase amount that home buyers can qualify for.
While those challenges provide a headwind, there are other forces providing additional momentum pushing prices higher. One of these forces is inflation. Since inflation is going higher, real estate will also go higher, because it is a reflection of the overall price levels in the economy. Real estate is the perfect inflation hedge, because as inflation goes higher, so does the price of real estate. During the last inflationary period of US history, the 1970s saw real estate appreciate an average of 9% per year. Compare that to the long term average of real estate price increases of about 3% per year. In addition, since inventory of existing homes for sale is the lowest in recent years, the natural effect of supply and demand will drive prices upward.
There is one more potential reason to expect real estate prices to go higher, and if you are a regular reader of this blog, you are acutely aware of my position and expectation. In times of economic uncertainty and fluctuations in the stock market, real estate is often used as a safe haven for investors. This will also drive real estate prices higher. As I have stated many times before, on this blog and other forums, money always seeks the highest returns. And when the stock market is tanking, as it did in 1987 and again in the early 2000s, the next obvious area for investors to place their capital is real estate.