Housing sales and prices in the United States
The latest update: According to various news sources, the U.S. property crash of 2022 have begun. Whereas a few metropoles will continue to slightly rise, a long list of cities have now begun to crumble.
The prelude to all this: During the pandemic, house price increases reached excessive levels. Yet when considering the earning potential of Americans, as reflected by the global house price affordability index where the U.S. ranks number 2 after Saudi Arabia, in many cities it is relatively affordable.
Latest rental yields and price appreciation:
- A near 20% rise in 2021 continued it’s trend in 2022, with a poor rental yield of 2.4% for larger properties, moving up to 7% for small dwellings.
WARNING TO FOREIGN INVESTORS: Extortionate property taxes means that it is almost as if you rent hour home from the government, in both republican and democrat states. From this perspective, international investors favor other jurisdictions.
- More than 3 million people stepped into retirement in 2020, freeing up significant capital.
- Foreigners are rushing back to invest in the US property market following the Biden presidency.
- The biggest risk to to the US housing market right now is the Coronavirus. It is estimated that already by mid March 2020, it has caused significant near term damage to asking prices and buyer sentiment.
- Even with foreign investors fleeing the US property market, strong local demand is still maintaining momentum. Recession fears did not affect the property market yet. The dollar volume of homes purchased by foreign buyers from April 2018 through March 2019 dropped 36% from the previous year, according to the National Association of Realtors.
2021 Is seeing a deceleration of the property boom and stock market rally, due to various geopolitical events and chiefly, the Coronavirus. Many were surprised to see the exact opposite than anticipated: a housing boom instead of a crash inspired by COVID-19.
The housing market appeared to be robust at the beginning of 2018, with high demand and increased construction. The National Association of Realtors (NAR) projected a 5% increase in the national median existing home prices. They predicted increased home sales of 700,000 new housing units and 5.7 million existing home units.
By the third quarter of 2018, home value growth slowed in more than half of the nation’s largest housing markets. One example is Seattle, where an annual growth of 12.4 percent in the previous years, slowed to 5% in the last seven months of 2018. Official statistics show that home value appreciation remained steady across the country with the median home value at $223,900, an increase of 7.6% from December 2017 when it was at 7.4%. Home value appreciation accelerated in some of the more affordable Southern markets from 8.1% to 13.2% in the past year.
Even though housing appreciation has stabilized there are fears that in some metros home values have outpaced incomes. Official statistics show that even though employment growth continues, the home value growth is not sustainable and expensive home markets will see decreased demand. Rising mortgage interest rates are contributing factors to decreased demand as are the recent tax reforms.
Contributors to real estate sell-offs
Chinese investors in the US sold over $1 billion worth of real estate properties in the third quarter of 2018. Investors from China have fueled real estate prices in many parts of the globe, and the US is no exception. The clamping down by Chinese authorities on capital outflows are measures taken to minimize losses to their currency, the yuan and their stock market.
The Chinese government is expected to sustain tight capital controls, even if an agreement is reached on the trade deal, expected by the end of February this year. Since the Chinese investors are finding it extremely difficult to channel funds through shell companies, demand will continue to drop and housing and other property prices will undergo corrections. A recent report by Pricewaterhouse Cooper found that prices are overvalued. When the U.S entered the recession of 2008, mortgage debt was close to $9.9 trillion and my mid-2018 it neared that at $8.94 trillion.
This increase in housing debt is a direct result of the major bull market and the significant gains of major stock indexes. Unfortunately, the market slowed down as fears of a protracted slowdown in China’s economy make headline news. This could lead to liquidations if lenders are unable to pay back their mortgages, and as previously seen in the U.S. it could lead to another burst bubble in the property market.
That said: The market does not face an ebb and flow situation with regards to foreign investment: for example, when Chinese investors poured in, Brazilians started to sell.
Rental yields in the United States:
Those seeking to invest in property in order to have rental yields need to invest carefully. Areas with high property prices do not necessarily have a high yield potential and landlords need to consider the difference between property cost and potential rental. Market trends show that average returns were highest in high-risk markets with higher unemployment and higher vacancy rates. Smaller markets have relatively higher rents when compared to their lower property prices and can offer higher gross rental yields. The gross rental yield does not include financing, property taxes, insurance, general maintenance, repairs and vacancies. As can be seen with the example of apartments for rent in Tampa, rental prices have made steady gains between 2020 and 2022.
The counties with higher rental yields include Baltimore City (28.5%), Clayton County (25.8%), Wayne County (24.2%), Bay County (21.2%) and Macon County (20.6%). Those with the lowest yields include Arlington County (3.3%), San Francisco County (3.4%), San Mateo (3.6%) and Santa Cruz, Santa Clara, Williamson and Kings County (Brooklyn) all at 4%. These figures prove that investing in most areas of California or New York could result in negative returns. There are often good deals to be found in most areas and the consensus is that studio apartments generally offer higher yields than larger units.
The U.S. has a complicated tax system with rental income categorized in two ways: Effectively Connected Income (taxed at progressive federal tax rates) or Fixed Determinable Annual Periodical Income (taxed at 30% and withheld by the tenant). Income taxes also vary in different states.
A Capital Gains tax is levied at 5% on properties held for more than a year, otherwise it is 15%.
Inheritance tax is exempt for up to $2,000,000 and is progressive with rates varying from 18% to 45%. Transfers of properties to beneficiaries who are more than one generation younger are also taxable.
Foreigners residing in the U.S. are taxed on their worldwide income, as are U.S. citizens.
Property purchase costs total between9% and 11% of which 6% are real estate broker’s fees. Property transfer tax varies between cities with New York at 1.425%. Legal fees, title search and insurance, and registration fees range from 1.70% to 3.50%.
The housing crisis a decade ago resulted in price drops of 33% on average. House prices have mostly recovered, rising at more than double the rate of inflation and wages have also risen over the last five years. This trend is expected to continue, even though at a greatly lower rate over the next two years, according to property market analysts. The S&P/Case Shiller composite index forecast that 20 metropolitan areas will rise 3.7% in 2019 and 2.8% in 2020. These rates have been adjusted down from 4.7% and 3.5% respectively. The expected slowdown in the growth of the economy, tax reforms and the predicted rates increases that will likely follow, have seen a drop in demand for home financing. There are also fewer homes up for sale, especially affordable ones since homebuilding has not kept up with the rate of demand that the falling rate of unemployment and improving wages has created. Analysts expect that the supply of affordable homes will remain the same or drop.
The world’s largest economy continued to strengthen through 2018 and 250,000 jobs were generated. If the growth continues, even at a slower pace, and the country makes it past June without a recession, then growth will have exceeded the 120 months of the 1991-2001 expansion. The strong growth in America will continue to boost other economies too.