As the end of 2018 soon closes, all eyes are turning to the prospects for economic growth in 2019. As seemingly always, growth comes from the US housing market or results in reinvestment in the US housing market. In either case, we see growth in or through the US housing market. People make more and buy more expensive homes. People make more because people are buying more expensive homes. It is like the chicken and egg problem. It doesn’t matter, which comes first, economic growth or housing growth. Each needs the other to grow. There are some strong head winds to housing in 2019, and certainly not all parts of America are seeing the same housing market prosperity. Rising interest rates and changes in tax policy will hit real estate in 2019 negatively. Is there enough income growth to overcome these headwinds? I have not seen it. Let’s examine some interesting graphics and data to reveal what has happened and what might happen in 2019.
First, what does it cost to buy a house in various parts of the US? The variation is tremendous, which exposes that our economy is really local not national, yet we have national interest rates and nearly a singular national mortgage policy. Homes are a driver or certainly derivative of the local economic condition.
Next, let’s consider the new tax law that caps mortgage interest deductions and state and local taxes. It is expected to have a highly negative impact on urban areas, with high local taxes and low to moderate economic growth. It’s not looking so good for the Northeast and Midwestern cities.
Let’s look at the projected impact of the tax change more closely. Here is graph that shows the areas of the US that have benefited in the past from generous tax deduction from mortgage interest and local taxes. Almost all urban areas are hit hard in the new tax policy.
But, it is fair to say that the cost of living is different across the country. It costs less to live in rural, small town areas than in San Jose, for sure. Let’s look at that:
Again, urban areas, not surprisingly, are most expensive.
Let’s examine how personal income has performed across the US. Yes, urban areas have grown, but there is also growth in the west and Florida. The rust belt states and much of the middle of the US have seen lower personal income increases.
The US has been experiencing a long-term migration of people to the west and Florida. The availability of highways and affordable air condition made this migration attractive. People also moved to get more valuable land, for new and better paying job, and to get away from the snow. Today, there are many reasons for people to leave the Northeast and Midwest: large state debts, slow income growth, and now abysmal real estate appreciation. Check out the population growth since 1950 by state.
Here is the famous Case-Shiller index. Indeed, the winners are those in the west and Florida. Many under-performing places in the Northeast and Midwest.
Here is a nice graphic that shows the number of days one needs to work to afford housing in location. In pricey places, Americans must work more to own a home. Obviously, don’t retire where it is pricey to own property.
As we enter 2019, housing prices are hottest in the west and Florida, but there has been some slowing of the housing marketing due to the increasing interest rates. We should expect property values in the Northeast and urban Midwestern cities to be hit hard due to the impacts of the new tax policy. Increases in the interest rate (to control inflation, presumably) will not help in any of these areas. Since most Americans have their personal wealth tied-up in their home and other real estate, expect 2019 to be a challenging year, unless you are in a delightful spot in the west or Florida.
Perhaps interest rates should be significantly lower in places like Chicago, Detroit, and Cleveland in order to spur people to move (or stay). Maybe higher interest rates would regulate growth in California or areas that need to examine housing solutions. The one shoe policy for interest rates does not work in such a varied housing market. Policy makers should look more closely at the impacts of interest rate policy on local communities.
Professor Walker provides keynote talks, seminars presentations, executive training programs, and executive briefings.
About Russell Walker, Ph.D.
Professor Russell Walker helps companies develop strategies to manage risk and harness value through analytics and Big Data. He is Clinical Professor of Managerial Economics and Decision Sciences at the Kellogg School of Management of Northwestern University. He has worked with many professional sports teams and leading marketing organizations through the Analytical Consulting Lab, an experiential class that he founded and leads at Kellogg.
His most recent and award-winning book, From Big Data to Big Profits: Success with Data and Analytics is published by Oxford University Press (2015), which explores how firms can best monetize Big Data through digital strategies. He is the author of the text Winning with Risk Management (World Scientific Publishing, 2013), which examines the principles and practice of risk management through business case studies.
2019 growth, case-shiller index, Cost of Living, economic growth, economics, economoy, featured, Florida, home prices, housing, interest rates, jobs, Midwest, migration, mortgages, New York Real Estate, population growth, prices, real esate prices, San Jose, state taxes, Tax deductions, Tax Reform, West, Zillow