Richard Stein – Realtor®, Douglas Elliman, GREEN, SFR, CBR, eCertified®

Local Agent, Worldwide Marketing – Douglas Elliman Real Estate formerly Prudential Douglas Elliman Real Estate

What Happened to the Condo Market?

The condo market has softened in recent years, but some housing analysts are wondering why. Several economists have pointed to condos as a more affordable alternative to traditional single-family homes, as demand for lower-cost housing from first-time buyers picks up. While townhome construction is reportedly now on the upswing, the construction of condos has been mostly stagnant.

Read more: Townhouse Starts Indicate Sturdy Market® notes in a new article that builders generally have an easier time renting out apartments in multistory buildings and towers on a monthly basis than selling condo units. It can also be more difficult to obtain financing on constructing condos than apartment rental buildings. Adding to the difficulties, some cities and state laws have left condo builders liable when issues arise from new developments, which can result in costly lawsuits. Banks have sharply curbed lending for condo construction, too, scarred from the losses of the recession and the housing crisis.

Condo construction comprised just 7 percent of the multifamily market in 2016, according to U.S. Census Bureau data. That is down from an average of 22 percent a year from 1985 to 2003. The condos that are being constructed tend to be high-end units in high-cost cities.

“Apartments have always been a larger share of the multifamily construction, but it’s even higher now,” Michael Neal, an economist at the National Association of Home Builders, told®. “Virtually all of multifamily construction is apartments.”

Existing condo and co-op sales rose 1.6 percent in January to a seasonally adjusted annual rate of 620,000, the National Association of REALTORS® reported this week. But sales are still 4.6 percent below a year ago. NAR reports that the national existing condo price was $231,600 in January, 7.1 percent higher than a year ago. 

A stronger demand for condos may be on the horizon, Neal says. The location of condos in pedestrian-friendly city centers may make them desirable to both younger generations and downsizing baby boomers. 

Source: “What’s Missing From the Housing Recovery? New Condos,”®

IRS: HELOCs Still Deductible for Renovations

Taxpayers can continue to deduct the interest they pay on home equity loans when the funds are used for home improvements, the IRS confirmed in a statement on Wednesday. The status of home equity deductions has been in question following the limits on the mortgage interest deduction included in recent tax reform legislation. The IRS says it has been fielding more questions from taxpayers and tax professionals on whether the interest on home equity loans, home equity lines of credit, or second mortgages can still be deducted.

In its statement, the IRS said despite the restrictions on mortgages, taxpayers can, in most cases, still deduct interest on home equity loans, a home equity line of credit, or a second mortgage.

The tax law, passed in December, suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit unless the funds are used to buy, build, or substantially improve the taxpayer’s home, the IRS notes. As such, the interest on a home equity loan used for building an addition to an existing home would generally be deductible, Accounting Today explains. But interest on the same loan used to pay personal living expenses, like credit card debt, would not be.

Under the new tax reform, a limit has been placed on mortgages qualifying for the home mortgage interest deduction. Starting in 2018, taxpayers can only deduct interest on $750,000 of qualified residence loans, or $375,000 for a married taxpayer filing a separate return—down from $1 million or $500,000 for a married taxpayer, respectively.

The IRS offered the following scenario in describing how the new tax law works when it comes to home equity loans:

“In January 2018, a taxpayer gets a $500,000 mortgage to buy a main home with a fair market value of $800,000. The following month, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total doesn’t exceed the home’s cost. Because the total amount of both loans doesn’t exceed $750,000, all the interest paid on the loans is deductible. But if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan wouldn’t be deductible.”

The National Association of REALTORS® welcomed the IRS  announcement Wednesday to clarify that tax deductions for home equity loans or home equity lines of credit can still be taken if used on home improvements.

“The National Association of REALTORS® is pleased with the IRS announcement clarifying and confirming that under the new tax law owners can continue to deduct the interest on a home equity loan, line of credit or second mortgage when the proceeds are used to substantially improve their residence,” said NAR President Elizabeth Mendenhall. “There has been much confusion on this issue, and the continued deductibility will bring real benefits to those who choose to take on remodeling projects to bring more resale value to their home or gain equity that may have been lost during the downturn.”

Source: IRS; “IRS Says Interest on Home Equity Loans Can Still Be Deducted,” Accounting Today (Feb. 21, 2018); National Association of Home Builders

Spring May Not Be Pretty for First-Time Buyers

A shortage of homes and surging prices are hitting first-time buyers particularly hard heading into the spring season. The share of first-time homeowners dropped to 29 percent of all existing-home sales in January, down from 33 percent a year ago, according to the latest housing report from the National Association of REALTORS®.

Read more: 2018 Home Sales Off to a Sluggish Start

“First-time buyers are typically people with a tighter budget,” says Joseph Kirchner,®’s senior economist. “They’re looking for homes on the more affordable end of the market, but that is where the lack of homes is most severe. … There’s plenty of demand, but people just cannot find a home on the market that meets their needs and they can afford. It’s not a good start for the spring market. The shortage will continue.”

In January, there were 15.5 percent fewer existing homes selling for $250,000 or less compared to a year ago. On the other hand, the biggest gains in homes were from those selling for $500,000 or more, which saw a 25 percent uptick.

Existing-home prices were up in every major region of the U.S. The West had the most expensive homes at a median of $362,600 in January, an 8.8 percent increase from over a year ago. The Northeast’s median prices reached $269,100 in January, up 6.8 percent annually. The South’s median home price of $208,200 is up 4.3 percent from a year ago, while the Midwest’s $188,000 median price is up by 8.7 percent.

“It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth,” Lawrence Yun, NAR’s chief economist, said in a statement.

Source: “Lack of Homes on the Market Tames a Toll on First-Time Buyers,”® (Feb. 21, 2018) and “Homeownership Is Increasingly for the Wealthy, According  to the Latest Sales Data,” CNBC 

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