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Housing Sunshine - November 6, 2018

The Case(s) for Optimism

With much of our reading portending trouble ahead in the housing market, see here and here, last week we highlighted that homeownership data from the US Census was a ray of good news (shown at right). Adam Ozimek of Moody’s Analytics explores this potential good news in “The Case for Single Family Optimism”. First, admitting that “the housing market has been sending worrying signals lately”, he explains that the market data is not bad in the larger context. Specifically, while single family starts may be down, they are well below “the normal pace prior to the housing bubble”. Additionally, while price growth has slowed, it is still clipping along “above 5.5% to 6.5%, depending on how you measure it”. Ozimek then goes on to discuss the underlying fundamentals - with improving homeownership rates, an improving labor market that he postulates leads housing by five to six years, and projections showing improving household formation, he believes that “the longer run picture is good, and a recovering homeownership rate is the fundamental behavior to watch.”

Surprising as it may be, in addition to the fundamentals, politics may offer some hope. First, we are watching as the IRS continues to clarify the rules for Opportunity Zones. Established as part of the 2017 Tax legislation, these specially designated zones are areas in which investors will receive special and specific tax breaks. The theory is that the tax breaks will spur investment and become a win-win as the affected communities receive much-needed development funds. As Ben Lane’s article in HousingWire points out, the rules are not yet clear, and the Treasury plans to issue additional guidance on Opportunity Zones by the end of the year. Though it is still early days, there are indications, such as this list of Opportunity Funds compiled by the National Council of State Housing Agencies, that some of the funds moved into Opportunity Zones will be used for housing, where the housing stock has a median age of 50 years according to an article from EIG.

Second, a number of states have measures on their ballots that could affect housing. California is perhaps the most prominent, with four different propositions focused on housing issues, summarized by a recent article in the Long Beach Press-Telegram. The propositions include measures on rent control, tax breaks for seniors, and spending on housing for a variety of those in need. Though the spending associated with these programs would be just a drop in the bucket in the massive California real-estate market, they show clearly that housing “is a top priority in California” and could be a harbinger of things to come as communities look for ways to improve housing affordability and availability.

P.S. While all eyes may be temporarily on the midterms, the meeting with Chinese officials on Friday, including two officials recently highlighted by the Washington Examiner as “power players”, could lead to some turbulence as the threat of additional tariffs still hangs in the air.