Will Stock Market Turmoil Spark A Decline In Luxury Home Buying?
Stock market turmoil in 2018 could cause a shift in the luxury home and condominium market after a banner year in 2017.
The stock market’s recent rocky two weeks, which saw the Dow Jones average drop 2,271 points from a record high of 26,616 points is not an economic confidence builder for wealthy home buyers with substantial stock investments.
Some $3 trillion in stock investments evaporated during the downturn, which Wall Street analysts labeled a “10% correction.” Although these were only paper losses for investors who did not panic and sell, even the most entrenched, conservative stock owners felt the psychological pinch in their wallets.
When hundreds of millions of dollars exited the market during a broad selloff in late
January, tens of millions moved to the safe haven of government bonds. Over the past two weeks the yield on 10-year Treasury notes rose sharply to 2.86%.
The upward movement of 10-year bond prices sparked a corresponding spike in 30-year fixed mortgage rates, which track Treasury notes.
Freddie Mac’s Primary Mortgage Market Survey reported that benchmark 30-year fixed rate loans averaged 4.32% on February 8th, up from 4.22% a week earlier and the highest mark since December of 2016. On February 9th, Chicago lenders were quoting a range of 4.126% to 4.36% on 30-year fixed mortgages, reports rateSeeker.com. A year ago at this time, the 30-year fixed loan average was 4.17% “The 10-year Treasury yield resumed its upward march, and mortgage rates followed,” noted Len Kiefer, Freddie Mac’s deputy chief economist. “The 30-year fixed mortgage rate is up 33 basis points since the start of the year.”
Despite all the volatility in the stock market and economy, experts say the Federal Reserve Board still is on course to raise interest rates three or four times in 2018, possibly pushing the federal funds rate as high as the 2%-to-2.5% range.
That scenario could mean sharply higher 10-year Treasury rates, which will translate into lenders charging an interest rate of 5.25% on 30-year fixed mortgages by the end of 2018.
Recently, RE/MAX Northern Illinois reported that luxury home sales in the city of Chicago were up sharply in 2017, gaining 18% to 1,332 units. However, a growing inventory of $1-million-plus home listings caused median sales prices to slip 1.7% to just under $1.35 million. Average market time was 136 days, three days longer than 2016.
Will higher mortgage rates break the luxury housing market’s momentum?
“It's too early to tell for sure, but initial readings indicate housing markets are sustaining their momentum so far,” said economist Kiefer of Fannie Mae. “The Mortgage Bankers Association reported that purchase applications are up 8% from a year ago in its latest Weekly Mortgage Applications Survey.”
Meanwhile, other analysts say it is likely that fewer wealthy home buyers, who are faced with a diminished stock portfolio and higher mortgage rates, will be shopping for $1-million-plus homes in 2018.
When smart purchasers compute the financial losses caused by tax reform legislation, the outlook for luxury home buying gets even gloomier.
Tax reform limits the tax deduction for property taxes on a primary residence to $10,000. Nearly two million Illinois residents used the property tax deduction in 2015 to claim an average deduction of $12,500 on their taxable income.
Million-dollar home and condominium buyers in Chicago’s upscale lakefront neighborhoods with property tax bills that exceed $10,000 will see their annual property tax write-offs reduced under tax reform.
The new tax law also reduces the mortgage interest deduction cap to $750,000 from $1 million. So, if a buyer borrows a $1-million to buy a luxury home in 2018, he or she can only write off the loan interest on $750,000 of the debt.
For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.