Housing market cooling off, uncertainty isn’t helping

Getty/David McNew

• The housing market has been losing momentum, with inventories
  rising to 2011 highs. 
• A mismatch between residential-real-estate activity and the
  rest of the economy may be worsening the slowdown. 
• Wage growth could help bridge the disconnect.

From rising prices to the new tax
law, economists say there are a number of conditions contributing
to a slowdown in the US housing market. But there may also be a
less tangible factor at play: uncertainty. 

The economy is humming, with
unemployment at multi-decade lows and signs of upward pressure on
wages. Alongside these robust metrics, however, consumers are
watching home inventories rise to the
highest level in years.

“Usually, consumers are used to
seeing the housing market perform in tandem with the economy,”
said Jonathan Miller, an appraiser and market analyst. “But
what’s been especially confusing over the last year and a half or
so is that they seem to be disconnected.”

Declines in
residential-construction activity and foreclosure rates have led
to historic housing shortages across the country in recent years.
Together with rising rates, an increasing number of Americans
have been priced out of the market.

Meanwhile, analysts say the

tax overhaul passed last year isn’t helping. By
curbing mortgage-interest deductions and
placing a $10,000 cap on state and local tax deductions, it wipes
out previous provisions that were designed to encourage Americans
to own homes.

That could be especially
discouraging for Americans living in states with high taxes and
expensive housing markets, like New York and California. A recent
Bank of America Merrill Lynch survey found affordability was
lowest in the Northeast and the West, with consumers reporting
less favorable buying sentiment in those regions than in the
Midwest and the South.

“This isn’t too surprising given
the growing gap between what homebuyers can afford and where home
prices stand today,” BAML said. “What’s clear in the responses is
that consumers believe the housing market has favored the seller
this year.”

Tariffs are adding to
uncertainty, according to Miller, with inflationary pressures and
shifting business activity raising questions about market value.
The Trump administration has placed tariffs on more than $300
billion worth of imports, prompting retaliatory measures from the
US’s closest trading partners.

“It’s almost like a wet blanket,
where the consumer is somewhat confused and they’re taking a
breath,” Miller said. “The sense of urgency is not there in the
market.”

An increasingly tight labor
market could help bridge the disconnect. There have been signs
Americans could soon begin seeing pay rates increase as companies
compete for employees. But real wage growth has been relatively
sluggish for awhile, increasing at about 2.9% on average over the
past year. 

“One of the missing equations
over the past decade has been wage growth,” Miller said. “If you
look at wage growth with inflation factored in and then at
housing prices, there’s a big disconnect.” 

BAML