2017 in Review and Real Estate Tax Law Changes
The year 2017 in Louisville residential real estate was marked by an acute shortage of houses priced under $200,000, historically high average selling prices (ending the year at approximately $208,000 vs. $175,000 in the last boom year of 2007, and up from $197,000 in 2016), and a historically short amount of time the average home stayed on the market for sale (just 44 days compared to 77 in 2007, and down from 51 days in 2016).
The high-end market in 2017 also showed impressive year-over-year gains. 682 properties sold for $500,000 - $999,999 vs. 581 in 2016 – a 17% increase. There was a 68% increase of properties that sold for $1 million or more in 2017 with 74 vs. 44 million dollar plus sales in 2016.
Here at Kentucky Select Properties we enjoyed our best year ever with $309 million in total sales volume, an increase of $37 million or 13.7% over 2016 (which had previously been the best year in company history).
4 Items of Note Regarding Residential Real Estate and the new Federal Tax Law
Capital Gain Exclusion - One of the most important provisions of the new tax law for many homeowners was not a change but a vote for the status quo with regards to the exclusion of capital gains on the sale of a principal residence. As long as you have lived in your principal residence for 2 of the 5 years immediately preceding the sale you remain exempt from paying tax on up to $250,000 of gain as a single filer and up to $500,000 when married filing jointly.
Mortgage Interest Deduction – The new law reduces the limit on deductible mortgage debt to $750,000 for new loans taken out after 12/14/17. Current loans of up to $1 million are grandfathered and are not subject to the new $750,000 cap. Under the new law you will no longer be able to deduct the interest on home equity loans (unless the proceeds are used to substantially improve the property).Interest remains deductible on second homes, but is subject to the $1 million / $750,000 limits.
Deduction for State and Local Taxes - The law allows an itemized deduction of up to $10,000 for the total of state and local property taxes and income or sales taxes. This $10,000 limit applies to both single and married filers.
Moving Expenses – With the exception of members of the Armed Forces, moving expenses are no longer deductible.
Prices Going Up or Coming Down in 2018?
Limited inventory has been one of the primary drivers behind several consecutive years of housing price increases in Louisville. As of the end of December 2017, the market wide absorption rate was only 2 ½ months. The absorption rate is the number of months it would take to sell all the currently listed homes on the market typically using the prior 6 or 12 months of sales as a baseline.
As a rule of thumb, 6 months of inventory is considered a balanced real estate market (favoring neither buyers nor sellers). Less than 6 months inventory is a seller’s market. More than 6 month’s inventory is a buyer’s market. While absorption rates vary by price range and even by neighborhood in most cities, houses priced at $200,000 and less have given rise to a major seller’s market in Louisville for the last few years. The high-end of houses priced at $500,000 and up is generally more balanced to, in some cases, a buyer’s market.
The National Association of Realtors predicts the number of homes available nationwide for sale should increase by the fall of 2018. Danielle Hale, chief economist for Realtor.com, says “The majority of the year should be challenging for most buyers, but we do expect growth in inventory starting in the fall. Once we start to see inventory turn around, there is plenty of demand in the market.”
Locally, unless there is a dramatic change in the number of new houses being built in 2018, I don’t expect housing inventory to grow much or prices to come down. According to the Building Industry Association of Greater Louisville (BIA) there were approximately 1,500 new homes built in Jefferson County in 2017 which was about a 24% increase over 2016 but far below the 3,500 to 4,000 new homes built in the 2005-2007 boom years prior to the recession.
In keeping with the trend line of the last 4-5 years, I’d expect to see sale prices continue to rise 5-7% across the Louisville market in 2018.