MReport July 2019

TheMReport — News and strategies for the evolving mortgage marketplace.

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54 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA Home Sales and Tax Reforms A New York Fed study reveals the correlation between tax reform and the housing market. D id the $10,000 cap on deductibility of state and local taxes on property introduced through the Tax and Jobs Cut Act of 2017 lead to a decline in home sales in 2018? New research from the Federal Reserve Bank of New York (New York Fed) points to a high possibility of this rule impacting home sales. The analysis which was pub- lished on New York Fed's Liberty Street Economics blog noted that while mortgage rates had risen by almost 70 basis points between the fourth quarter of 2017 and the third quarter of 2018, sales of new homes had declined by 7.6% and those for existing homes had dipped 4.6% during the same period. However, the researchers, Richard Peach, SVP, in the New York Fed's Research and Statistics Group and Casey McQuillan Senior Research Analyst in the New York Fed's Research and Statistics Group noted that these declines in home sales were larger than in the two previous episodes when mortgage interest rates rose by a comparable amount. Also, the largest decline in home sales, according to the research was seen in home sales in the higher price range, where the $10,000 cap was most likely to have made an impact. The New York Fed said that while its analysis provided cir- cumstantial evidence that specific provisions such as "a $10,000 cap on the deductibility of state and local taxes, a lower limit on the amount of mortgage debt on which interest is deductible, and lower marginal tax rates have negatively impacted the housing market," it remained to be seen exactly how much of the recent home sales decline was due to "higher interest rates versus changes in tax law." Comparing the rise in interest rates in 2017-2018 with two previ- ous such bumps (Q1 2013 to Q 4 2013 and Q2 2016 to Q1 2017) the researchers revealed that between Q2 2016 and Q1 2017, home sales had actually risen 10%. They also noted that during these periods, unlike what was seen in 2017- 2018, whenever sales did fall "the declines were concentrated in the lower price ranges while the sales in higher price ranges continued to increase." The research concluded that with the economy booming in 2018, it was expected that the housing market would most likely "shrug off" the rise in interest rates as seen during the previous two periods. However, "this most recent episode is qualitatively dif- ferent because of changes in the tax code," which when combined with the rise in interest rates increased the marginal user cost of capital for homeowners, "espe- cially for higher-priced homes and homes in high-tax jurisdictions." Spending for a Sale Home sellers might actually be surprised with the cost associated with selling their home according to a study. H ome sellers are likely spending almost $21,000 in additional costs to sell their homes, ac- cording to an analysis by Zillow and Thumbtack. These costs in- clude prep activities like painting and staging the home for sale. The analysis revealed that these costs come as an unwelcome sur- prise for almost half the sellers who are doing this activity for the first time. It indicated that almost 79% of sellers completed at least one home improvement project before putting their property on the market. "Selling is often a complicated process that can sometimes require extensive prep work in order to put your best foot forward for a successful sale," said Skylar Olsen, Director of Economic Research at Zillow. "It also comes with huge transaction costs that aren't neces- sarily top of mind to someone who hasn't sold a home in a while or never has had the pleasure. Selling was hard even in the sellers' market of recent years, and it's going to get harder as markets soften." One of the key costs that home sellers need to budget for are clos- ing costs. The analysis revealed that these expenses, which include agent commissions and transfers or sales tax, could add up to $14,281, on average, but because they are based on the home's sale price, sellers in the nation's prici- est markets pay much more. For example, in San Jose sellers pay $76,015 on average in closing costs, the highest of metros analyzed. By comparison, sellers in Cleveland spend the least at $9,046. Additionally, sellers who hire professional help for common home prep projects tend to spend, approximately $6,570 on improve- ments like interior and exte- rior painting, staging, and carpet cleaning, as well as local moving costs to their new home, the analysis indicated. And while these costs may initially pinch the homeowners' pockets, the analysis found that sellers who made these improve- ments were more likely to sell at a higher rate than the asking price compared with those who didn't. "While the costs of these touch- up projects can add up, particu- larly in high cost of living metros, sellers should remember that by taking care of these projects, they can get a really strong return on their investment and may be more likely to sell their home for the highest possible price," said Lucas Puente, Economist at Thumbtack.

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