Mixed signals in the U.S. housing market
Last Updated: August 15, 2015
House prices aren't rising as fast as they were. The annual increase of 4.26% y-o-y in the first quarter 2015 in the S&P/Case-Shiller seasonally-adjusted national home price index (4.34% in real terms) was the lowest since Q3 2012. There was a 4.39% price rise during the year to May 2015 (4.43% in real terms).
A slowdown is also suggested by Federal Housing Finance Agency (FHFA) figures, with a 4.96% y-o-y rise in the seasonally-adjusted purchase-only U.S. house price index (5.03% in real terms). The index rose by 1.32% q-o-q (1.88% in real terms) during the latest quarter, Q1 2015.
Most tellingly, the median sales price of new homes sold in the U.S. actually fell by 1.8% during the year to June 2015, to US$ 281,800, according to the U.S. Census Bureau.
Yet demand has been shooting up. New house sales rose by 18.1% during the year to June 2015, according to the U.S. Census Bureau. Most sales transactions were in the South (58.5% of all houses sold), according to the U.S. National Association of Realtors.
The U.S. home builder sentiment in July 2015 was at 60, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) - the highest level since November 2005.
“The fact that builder confidence has returned to levels not seen since 2005 shows that housing continues to improve at a steady pace,” according to NAHB Chairman Tom Woods. A reading of 50 is the midpoint between positive and negative sentiment.
New privately-owned housing unit starts were up by 26.6% y-o-y to June 2015, while housing completions increased by 22%, according to the U.S. Census Bureau.
Not surprisingly, forecasters expect US housing prices to continue rising in 2015. CoreLogic projects a 5% to 6% increase in its national home price index. The Zillow Home Price Expectations Survey expects U.S. home values to increase by an average 4.4% in 2015. Barclays Bank predicts 3% to 4% growth in 2015. The bank sees tighter credit conditions and higher mortgage interest rates, as factors that could limit the appreciation of home prices.
Good yields in Miami, poor yields in New York
Apartments in the Upper East and Upper West sides of Manhattan cost on average USD 14,000 to USD 24,500 per square metre (sq. m.) (or USD 1,309 to USD 2,290 per square foot). In lower Manhattan - Chelsea, Greenwich Village, Soho and Tribeca, apartments tend to be more expensive, with prices per sq. m. ranging from around USD 22,000 to USD 25,000 (or USD 2,056 to USD 2,337 per square foot).
In both Upper and Lower Manhattan, bigger apartments tend to cost more. For example in Upper Manhattan, a 120 sq. m. apartment costs (=1,291 square feet) around USD 17,980 per sq. m., (or USD 1,681 per square foot) whereas a 275 sq. m. apartment costs USD 24,500 per sq. m. (or USD 2,290 per square foot), on average.
In Lower Manhattan, a 120 sq.m. (=1,291 square feet) apartment costs around USD 22,500 per sq.m. (USD 2,103 per square foot), whereas a 250 sq. m. (= 2,675 square feet) apartment costs around USD 25,300 per sq.m (USD2,365 per square foot).
Monthly rents in Upper Manhattan range from USD 53 to USD 87 per sq. m, (= USD 5.00 to 8.10 per square foot) whereas in Lower Manhattan, monthly rents range from USD 70 to USD 74 per sq. m. (= USD 6.47 to 6.94 per square foot). Upper Manhattan apartments return rental yields of around 4.3%, while in Lower Manhattan, rental returns are a little lower.
Miami. Gross rental yields in Coral Gables and Key Biscayne, at the top-end of Miami property, range from 4.8% to around 6.0%. These yields have dipped significantly over the past year. In Aventura, also an upscale residential neighborhood (but slightly less elite), gross rental yields are excellent on small apartments, with a 80 sq. m. apartment earning around a 9.2% rental return, and 120 sq. m. apartments earning 7.1%. Bigger apartments of 200 sq. m. return less good rental yields, with a typical yields being around 6%.
Condominiums and townhouses in Coral Gables and Key Biscayne in Miami cost around USD 6,000 to USD 8,600 per sq.m. (or USD 561 to USD 804 per square foot). In Aventura prices per sq. m. of condos and townhouses range from USD 2,600 to USD 3,700 (or USD 243 to USD 346 per square foot) on average.
Monthly rents in Coral Gables and Key Biscayne range from USD 29 to USD 35 per sq. m. (or USD 2.8 to 3.2 per square foot), whereas in Aventura, monthly rents range from around USD 18 to USD 20 per sq. m. (USD 1.7 to USD 1.9 per square foot).
Round trip transaction costs are moderate in the US, but higher than necessary due to high realtor costs Property transaction costs analysis for the US and Property transaction costs in the US, compared to Canada
The complicated U.S. tax system
Rental Income: Rental income is categorized as either Effectively Connected Income, wherein it is taxed at progressive federal tax rates, or Fixed Determinable Annual Periodical income, wherein it is taxed at 30% withheld by the tenant.
States also levy income taxes at varying rates.
Capital Gains: Capital gains tax for properties held for more than a year is 5%; otherwise the tax is 15%.
Inheritance: Federal estate tax is progressive with rates at 18% to 45% and an exemption of up to US$2,000,000. A Generation-Skipping Transfer Tax is also being levied on transfers to beneficiaries who are more than one generation younger than the transferor.
Residents: Resident foreigners, like U.S. citizens, are taxed on their worldwide income.
U.S. buying costs range from low to moderate
Roundtrip transaction cost is around 9% to 11%. Significant costs include the 6% real estate broker's fee and real property transfer tax, at around 1.425% in New York City. Total costs for legal fees, title search and insurance, and registration fees range from 1.70% to 3.50%.
U.S. housing law is pro-tenant
Strong anti-discrimination laws make the US slightly pro-tenant.
Rent Control: There are subtle rent control laws in 5 states; however their laws also have provisions to give landlords a fair return of investment.
Tenant Security: It is advisable for landlords to write a report citing all the allowable reasons when declining a prospective tenant. Tenants can also charge landlords with intentional infliction of emotional distress to fend off eviction.
Economic growth will be moderate in 2015The world’s largest economy accelerated in Q2 2015, with GDP rising by 2.3% y-o-y. This signaled a rebound from the first quarter's weak growth of 0.6% y-o-y. The second quarter's fast-paced expansion was fueled by private consumption, and an improving labour market.
The U.S. economy expanded by 2.4% in 2014, 2.2% in 2013, 2.3% in 2012, 1.6% in 2011, and 2.5% in 2010, according to the International Monetary Fund (IMF).
The economy is expected to continue with moderate growth, with a predicted 1.8% to 2% growth in 2015 and 2.4% to 2.7% growth in 2016, according to the Federal Reserve’s June 2015 Federal Open Market Committee (FOMC) meeting. Meanwhile, the IMF recently reduced its GDP projection for 2015 from 3.1% to 2.5%.
This full-year’s budget deficit will likely be the lowest deficit in eight years, with an estimated year-end total of around US$ 425 billion or 2.4% of GDP, down from US$ 483 billion or 2.8% of GDP in 2014, according to the Congressional Budget Office (CBO) - and down from 10.1% of GDP in 2009.
Inflation is expected to fall to 0.1% in 2015.
In July 2015, unemployment in the U.S. was 5.3%, according to the Bureau of Labor Statistics (BLS) - a seven-year low reached in June 2015, down from the 6.2% unemployment rate the previous year. The country added around 215,000 jobs in July 2015, mostly in financial services, retail trade, professional and technical services, and health care.
Analysts see a possible US interest hike in September. In June 2015, the Federal Reserve raised its labour market assessment, stating that the labour market continue to "improve, with solid job gains and declining unemployment".
“With the Fed’s decision on the timing of the first rate rise being ‘data dependent’, today’s report does nothing to discourage the belief that a September hike is very much on the table, albeit by no means a done deal," said Markit’s chief economist Chris Williamson.
The country’s unemployment rate averaged 5% from 1998 to 2008. Its recent peak year was 2010 with 9.6% unemployment.
In July 2015, average weekly earnings increased by 2% from the same period last year, to US$860.78.