American consumers generally hailed the “Tax Cut and Jobs Act” signed by President Trump just before Christmas of last year.
Before and after the legislation was signed into law, many pundits warned their optimism might not be warranted.
There were debates over whether ‘Main Street’ would experience any real gains from the law. S0-called experts argued whether the modest gains consumers might enjoy were front-loaded (to appease red state voters in the mid-term and 2020 election cycles) and if consumers would forfeit more than they gained during the latter half of the eight-year life span of the tax cuts.
The economy had been chugging along and the stock market had been setting new records at the time the legislation was signed into law. The Federal Reserve had already raised the federal funds rate three times during 2017, and pundits were warning tax cuts might further over-heat the economy…thereby making continued rate hikes a foregone conclusion.
Two-and-a-half months after the tax cut was signed, there is debate as to just how many people actually received a tax savings as a result of the GOP tax cut, and how sizable those savings have been. (NOTE: A US News and World Report poll reports only 2 percent of Americans indicated they received higher wages after implementation of tax cut)
And, surprisingly, there is no agreement on what any of this means.
Even among those people who believe consumers have benefitted from the tax cut, there is no consensus as to how these savings will impact the economy. Some insist taxpayers will spend their extra money… others suggest they will pay down debt… while others believe consumers (notably, young people) will save their money to accumulate a down-payment for a home.
In the upcoming months, it appears likely interest rates will continue to rise in response to rising inflation (at 2.2% in February, up from 1.7% during the middle of last summer). Those higher interest rates will eat into what home buyer’s can afford, reducing what they will be able to pay for a new home.
The upward pressures placed on housing prices by limited demand and the entry of new buyers into the marketplace will be offset by higher interest rates. As the cumulative effect of increased rates build, it is very possible those increased rates will eventually cause housing prices to stagnate…which will be good for buyers, but not good for home owners who are thinking about selling.
Terry Loebs, whose company (Pulsenomics) recently conducted a survey for Zillow, says interest rates will have an impact on home prices, especially for those who may be looking to seller higher-valued properties. Still, he sees a continued growth in home prices, at least in the short term: “(For 2018) (t)he experts project that the value of homes in the bottom third of the market will appreciate at 6 percent…double the rate expected for the highest-priced tertile.”
To whatever extent the GOP tax cuts may put some money in consumer’s front pockets, the long-term effect may be an increase in interest rates, which should then result in lower prices for home sellers and less bang for the buck for home buyers.
A little money into the front pocket…but a lot more money out of the back pocket? Time will tell…[NOTE: A home owners monthly mortgage payment is represented by the acronym PITI: Principal + Interest + Taxes (property) + Insurance (homeowners)
A buyers monthly home budget is limited by their income and liabilities, their credit history and credit score, and the loan program to which they are applying.
For the sake of argument, let’s say the consumer’s debt is minimal ($250/m) and their credit score is 720…and that the resulting debt-to-income limit (for the purpose of the home purchase) is set by the lender at 45%.
For the Buyer(s) who earn $60,000/year, the monthly PITI would be $2,000. Assuming property taxes at $550/m and homeowners insurance of $75/m, that leaves the buyer $1,375/m for principal and interest.
The more of that amount that is applied to interest, the less that can be applied to principal…and the less that is available for principal, then the lower the purchase price will be.
Last August, mortgage interest rates were at 3.86%… last week they were at 4.375%. That’s an increase of a little over one-half point (0.515%).
Assuming an FHA loan with a 3.5% down-payment, this Buyer could have afforded to purchase a home for $303,000 last summer…as of now, that figure has been reduced to a little more than $286,000.]