National Association of Realtors Economist's Outlook

Construction and Housing Starts Outlook for 2019—2028

Posted in Economist Commentaries, by Scholastica (Gay) Cororaton, Research Economist on May 1, 2019

Job growth continues to increase strongly, with the economy generating 2.5 million jobs in March 2019 from one year ago. Payroll employment rose in March 2019 from one year ago in all industries except for information services, utilities, and retail trade. With the economic recovery now on its 10th year of expansion, payroll employment has increased by 2.3 million annually since September 2010. With the unemployment rate at a low level of 3.9 percent, wages[1] have also been rising faster than inflation in all major industry groups except transportation and warehousing and manufacturing.
Construction jobs[2] rose by 239,000 in March 2019 from one year ago, the fourth largest source of job growth, next to health care & social assistance, accommodation & food services, professional & technical services, and manufacturing.
In terms of level change, the largest increases in construction jobs occurred in California, Washington, Nevada, Arizona, Texas, New York, Georgia, Florida, and West Virginia. As of March 2019, construction jobs made up a larger fraction of total nonfarm payroll employment—at six to eight percent—in Washington, Nevada, Utah, Idaho, Wyoming, Colorado, Florida, as well as Louisiana and West Virginia.

Notwithstanding the sustained and solid growth in construction jobs, residential construction employment is still below the peak pre-recession level. As of March 2019, there were 550,000 fewer people employed in residential building construction and specialty trades (2.9 million) compared to the peak levels during the housing market boom (3.45 million). Lack of construction labor has constrained the building of new homes, leading to a tight housing market.
In contrast, non-residential (‘commercial’) construction is now slightly above the peak pre-recession level. As of March 2019, there were 26,000 more people employed in the non-residential building construction and specialty trades (3.47 million) compared to the peak level during the housing market boom (3.44 million). The industrial and office commercial sectors have been growing strongly amid sustained economic growth, the penetration of data and technology in every industry requiring data storage facilities, and the expansion of e-commerce which has increased the demand for warehouses and distribution centers.

Housing starts projections for 2019-2028
During 2016 through 2018, jobs in building construction and specialty trade rose five percent on average and there was one housing start per five jobs created. Based on these recent trends, one can project that housing starts will increase from 1.362 million in 2018 to 2.0 million by 2028. In 2019, this means an increase of only 56,000 housing starts, and in 2020, an increase of 57,000 housing starts. This is still below the shortage of about 600,000 units[3] based on household formation and for replacement for obsolete/demolished housing.

Housing supply will continue to remain tight unless constructions job growth accelerates to more than the current annual pace of four percent. Addressing the current housing supply constraints will require collaboration between industries and trade-schools in attracting workers, including women, in construction. The relatively higher wage of construction workers compared to workers in manufacturing, transportation, and warehousing, education and health, retail trade, hospitality, and private industries in general, should attract workers in construction compared to these other industries, if workers are trained in these specialty skilled jobs.
With demand likely to outpace supply, there will also be increasing demand for housing that requires less construction labor, such as panelized and modular construction and manufactured housing.

View the State Employment Monitor report here.

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[1] Average weekly wages, Bureau of Labor Statistics
[2] The construction industry (NAICS Code 23) is composed of the construction of buildings (residential and non-residential), heavy and civil engineering construction, and specialty trade contractors (residential and non-residential).
[3] Currently, there are 1.1 million housing starts, while household formation is running at about 1.3 million, a deficit of 200,000 units related to household formation alone. In addition, about 450,000 housing units are needed to replace units lost to obsolescence or that are demolished (0.36% of housing stock of 1.127 million units.

Are Closing Costs Tax Deductible Under the New Tax Law?

Are closing costs tax deductible? What about mortgage interest? Or property taxes? The answer is "It depends."

Basically, you’ll want to itemize if you have deductions totaling more than the standard deduction, which is $12,000 for single people and $24,000 for married couples filing jointly. Every taxpayer gets this deduction, homeowner or not. And most people take it because their actual itemized deductions are less than the standard amount.

But should you take it?

To decide, you need to know what’s tax deductible when buying or owning a house. Here’s the list of possible deductions:

Closing Costs:  

The one-time home purchase costs that are tax deductible as closing costs are real estate taxes charged to you when you closed, mortgage interest paid when you settled, and some loan origination fees (a.k.a. points) applicable to a mortgage of $750,000 or less.

But you’ll only want to itemize them if all your deductions total more than the standard deduction. 

Costs of closing on a home that aren’t tax deductible include:

• Real estate commissions
• Appraisals
• Home inspections
• Attorney fees
• Title fees
• Transfer taxes
• Mortgage refi fees

Mortgage interest and property taxes are annual expenses of owning a home that may or may not be deductible. Continue reading to learn more about those. 

Mortgage Interest

Yearly, you can write off the interest you pay on up to $750,000 of mortgage debt. Most homeowners don’t have mortgages large enough to hit the cap, says Evan Liddiard, CPA, director of federal tax policy for the NATIONAL ASSOCIATION OF REALTORS®. But people who live in pricey places like San Francisco and Manhattan, or homeowners anywhere with hefty mortgages, will likely maximize the mortgage interest deduction.

Note: The $750,000 cap affects loans taken out after Dec. 17, 2017. If you have a loan older than that and you itemize, you can keep deducting your mortgage interest debt up to $1 million. But if you re-fi that loan, you can only deduct the interest on the amount up to the balance on the day you refinanced – you can’t take extra cash and deduct the interest on the excess.

Home Equity Loan Interest

You can deduct the interest on a home equity loan or a second mortgage. But — and this is a big but — only if you use the proceeds to substantially improve your house, and only if the loan, combined with your first mortgage, doesn’t add up to more than the magic number of $750,000 (or $1 million if the loans were existing as of Dec. 15, 2017).

If you use a home equity loan to pay medical bills, go to Paris, or for anything but home improvement, you can’t write off the interest on your taxes.

State and Local Taxes

You can deduct state and local taxes you paid, including property, sales, and income taxes, up to $10,000. That’s a low cap for people who live in places where state and local taxes are high, says Liddiard.

Loss From a Disaster

You can write off the cost of damage to your home if it’s caused by an event in a federally declared disaster zone, like areas in Florida after Hurricane Michael or Shasta County, Calif., after a rash of wildfires.

This means standard-variety disasters like a busted water pipe while you’re on vacation or a fire caused because you left the toaster on aren’t deductible.

Moving Expenses

This deduction is also only for some. You can deduct moving expenses if you’re an active member of the armed forces moving to a new station.

And by the way, no matter who you are, if your employer pays your moving expenses, you’ll have to pay taxes on the reimbursement. “This will be a real hardship to many because it’s non-cash income,” says Liddiard. Some employers may up the gross to provide cash to pay the tax, but many likely will not.

Home Office

This is a deduction you don’t have to itemize. You can take it on top of the standard deduction, but only if you’re self-employed. If you are an employee and your boss lets you telecommute a day or two a week, you can’t write off home office expenses. You claim it on Schedule C.

Student Loans

Anyone paying a mortgage and a student loan payment will be happy to hear that the interest on your education loan is tax-deductible on top of the standard deduction (no need to itemize). And you can deduct as much as $2,500 in interest per year, depending on your modified adjusted gross income.

Ways to Increase Your Eligible Deductions

There are some other itemize-able costs not related to being a homeowner that could bump you up over the standard deduction. This might allow you to write off your mortgage interest. Charitable contributions and some medical expenses are itemize-able, although medical expenses must exceed 7.5% of your adjusted gross income.

So if you’ve have had a hospital stay or are generous, you could be in itemized-deduction land.

Also, if you’re a single homeowner, it could be easier for you to exceed the standard deduction, Liddiard says. The itemized deductions on your house will probably more quickly break the $12,000 standard deduction threshold than a couple’s similar house will break their $24,000 threshold.

Tax-Savvy Home-Buying Ideas

If you’re a prospective homeowner with an eye to making the most efficient use of your tax benefits, here are a few ways to buy smart:

• Especially in expensive areas, buy a less expensive home so you don’t hit the cap on mortgage debt and local and property taxes, says Lisa Greene-Lewis, a CPA and tax expert for TurboTax.
• If you’re buying a higher price home, make a bigger down payment so your original mortgage doesn’t exceed the $750,000 cap.

How to Decide If You Should Itemize

Though every homeowner’s tax benefits will be a little different, in the end, you’re building equity, you’ll likely make money when you sell, and you have the freedom to paint your walls any color you want and get a dog.

COPYRIGHT©  2019 CALIFORNIA ASSOCIATION OF REALTORS®

California’s Fading Promise: Millennial Prospects in the Golden State

In a state where housing prices are 230 percent above the national average, California’s millennial generation faces unprecedented economic challenges and diminished prospects with respect to housing, according to a new whitepaper presented by Joel Kotkin, RC Hobbs Presidential Fellow in Urban Futures, Chapman University.

Kotkin presented the findings of “California’s Fading Promise: Millennial Prospects in the Golden State” at a C.A.R. Center for California Real Estate (CCRE) event in Sacramento last week, hosted by C.A.R. CEO Joel Singer. Millennials’ incomes are not higher than those in key competitive state, but the costs they must absorb, particularly for housing, are the highest in the country. Their prospects for homeownership are increasingly remote, driving substantial out-migration from the state. The report, sponsored by CCRE, found California has experienced a net loss in migrants for at least the last 15 years.

Rather than limit new construction to apartments and condos in “infill” development, Kotkin suggested using vacant land in interior communities like the Inland Empire and Central Valley.
The report also outlines other steps that could bring more millennials into the housing market and restore middle class prosperity to California.
Read the full report.

REALTORS® Confidence Index

The REALTORS® Confidence Index is a key indicator of housing market strength based on a monthly survey sent to over 50,000 real estate practitioners. Practitioners are asked about their expectations for home sales, prices and market conditions. In addition, the "Questions of the Month," feature results of a timely aspect of the housing market.
Note: the REALTOR® Confidence Index is provided by NAR solely for use as a reference. Resale of any part of this data is prohibited without NAR's prior written consent.

Highlights

• Properties were typically on the market for 26 days (29 days in April 2017).

• First-time buyers accounted for 33 percent of sales (34 percent in April 2017).

• Cash sales made up 21 percent of sales (21 percent in April 2017).

• REALTORS® report “low inventory”, “interest rates”, and “multiple offers” as the major issues affecting transactions in April 2018.

Where in the U.S. are properties selling fastest?

In Which States Did Properties Sell Most Quickly in October 2017?

Posted: 30 Nov 2017 06:23 AM PST

Amid strong demand and tight supply, REALTORS® reported that properties that sold in October 2017 were typically on the market for 34 days in October 2017, down from 41 days compared to October 2016, according to the October 2017 REALTORS® Confidence Index Survey.[1]
During the August–October 2017, properties sold in less than 31 days in 18 states and in the District of Columbia, with properties selling most quickly in these areas: Washington (22 days); Nevada (23 days); Colorado (25 days); Massachusetts, the District of Columbia, California, Minnesota, and Utah (25 days), Kansas, Nebraska, Tennessee, and Oregon (26 days); Texas, Georgia (28 days), Indiana, Kentucky, Iowa (29 days), and South Dakota, Wyoming (30 days).

According to Realtor.com data, properties sold most quickly in the metro areas of San-Francisco-Oakland-Hayward (31 days), San Jose-Sunnyvale-Sta. Clara (31 days), and Seattle-Tacoma-Bellevue (37 days). Properties sold quickly within 45 days in other metro areas in California, Washington, Utah, Tennessee, Colorado, Arizona, Idaho, Minnesota, Wisconsin, and Massachusetts.
Amid tight supply, the median days on market have been broadly on a downtrend since 2011 when the properties typically were on the market for three months from May 2011, when this question was first asked in the RCI Survey, through March 2012.

Exchanges can have a lot to “like”

Like-kind exchanges, or in IRS talk “IRC Section 1031” is an investors dream come true. 

Whenever you have an investment that has gone up in value from the time you bought it to the time you sell it you pay a capital gain tax on the profit. Unless you choose to defer that gain by using the “1031 like-kind exchange rule” IRC Section 1031 allows you to defer the gain on an investment by using the money gained to buy another similar property. This is not a tax free exchange – but it does put off paying that tax until a later date.

Both personal and real property can qualify for an exchange. However, the rules for personal exchanges are far more strict.  To accomplish a Section 1031 exchange, there must be an exchange of properties.  The simplest type of Section 1031 exchange is a simultaneous swap of one property for another. This is usually done with the help of an intermediary who knows all the rules required by the IRS. Most importantly the timelines; From the time you sell the one property you have 45 days to identify an exchange property and 180 days to complete the purchase. Meanwhile, you cannot take any of the gain or it becomes a taxable event. It is possible to take some cash and invest the rest – just know that you will pay tax on whatever you take out of the exchange and don’t take that cash before the exchange is complete or the whole deal can be blown!

It may sound somewhat complicated but believe me, this has been one of the best investor vehicles for deferring the dreaded capital gains tax. I am not a tax consultant – thank goodness, but if this sounds interesting to you, I can put you in touch with a very experienced intermediary and/or tax consultant that together we can walk you through the whole process from beginning to end.