With the stock market as nuts as it is, there has been preciously little talk about the real estate market. While housing did somewhat dodge a bullet because interest deductions were not entirely done away with in the recent tax overhaul, some think the market is ripe for a big fall. By some indicators, the market is overheated, with hefty price gains and wide optimism, leading some to hear echoes of 2005. However, generational factors seem likely to bolster the market as Millennials age into home ownership and Baby Boomers sell their homes and move into assisted and planned communities.
FINSUM: The market probably won’t fall legitimately until we have another recession. However, given the fact that Millennials (the largest generation) are just entering the home buying age, it appears there will be robust demand for years.
Here is a head-spinner: the US is the world’s new tax haven, at least according to Bloomberg. That is a huge shift for a country whose tax policy used to compel companies to reincorporate overseas in “tax inversion” deals. But it is actually a different policy that has made the US a tax haven—a lack of reciprocation in data sharing. Unlike many of its overseas counterparts, the US government cannot compel banks to disclose balances or beneficial owners of accounts, letting wealthy foreign citizens stash cash in US banks to evade foreign taxes.
FINSUM: This may be good business in the long run, but having a standard that others must abide by, but not doing so itself, is the kind of practice that undermines relations with other states.
There is a significant sector of the real estate market that looks like it may be set to go through a tough stretch. That sector is office space. Starting three years, new office construction began to surge, leading to a buildup in office inventory. That construction continues today, and now ratings agency Moody’s is warning about the risk. At the same time, demand is supposed to weaken, meaning there will be a lot of vacancies. While that may be good for tenants, it will be bad for creditors and bondholders, and cash flow could weaken.
FINSUM: Credit growth in the space has been relatively restrained, so we are not expecting a big reckoning here.
The new tax package was not hugely lauded for its potential effects on real estate. The limit on mortgage interest deduction and the limit for SALT deductions means it is perceived as possibly being negative for residential real estate. However, in some markets it may prove a winner, according to the WSJ. In particular, states with low taxes that are home to growing cities, like Raleigh, Austin, and Charlotte. The lack of affordability of living in higher tax states seems likely to take a bite of those home markets and send more people moving to low tax states.
FINSUM: Current estimates show that the tax package is likely to have a negative affect on real estate for about 80% of the counties in the US. But the other 20% should do well.
For business owners, one of the very exciting parts of the new tax package is the introduction of lower rates for pass-through entities like LLCs. However, using that new rate is more complicated than many would like. It takes the form of a 20% education for business owners, but it is still unclear whether it is more favorable to be a regular corporation or a pass-through entity. The nation’s army of tax professionals and lawyers are working frantically to come up with answers to that question, as the new package takes effect in just a week.
FINSUM: Accountants say there is a huge possibility for loopholes in the new rules. If you are planning on listing a new entity, it seems wise to hold off for a few months, if possible, to see what emerges as the consensus view on structure.
During the process of drafting the new tax plan, there was a great deal of consternation that the new policy may hurt the US real estate market. In particular, this was because of the possible elimination of the mortgage interest deduction. That came to be, but in a very watered down form. Now, looking at the market, 2018 seems poised to be a very good year. The inventory of homes for sales is just about at an all-time low, the prospect for construction looks high, and overall, those in the industry seem to be salivating over what is to come.
FINSUM: Real estate looks poised for a good year, but the x-factor could be the Fed and interest rates, which could scare away some buyers.