New Review Spotlights the Unintended Consequences of Rent Control

2024-09-09T10:25:02-05:00

Although rent control policies do, in fact, produce lower rents in the controlled units as intended, these policies also have a number of unintended and undesirable consequences, according to a recently published review of the academic literature. Among the unintended consequences are a reduced supply of housing, higher rents in uncontrolled units, reduced quality in the controlled units, and reduced residential mobility. The review is titled “Rent Control Effects Through the Lens of Empirical Research: An Almost Complete Review of the Literature,” authored by Konstantin Kholodilin and  published in the March 2024 issue of the peer-reviewed Journal of Housing Economics. The review covers 112 empirical rent control studies based on a wide range of data sources and published between 1963 and 2023. The table below summarizes the theoretic rent control effects analyzed in more than six of the studies. In addition, there were thirteen studies that all find that rent control resulted in misallocations of resources of various types. Policymakers should be particularly concerned with the findings that rent control results in a reduced supply of housing and higher rents in the uncontrolled units. Builders, of course, are likely to focus on the depressing effect rent control has on new construction, which is consistent with research NAHB undertook jointly with the National Multifamily Housing Council (NMHC) in 2022. In that research, NAHB and NMHC asked multifamily developers if they avoid building in jurisdictions with rent control. Over 85% said yes. Kholodilin’s review concludes that rent control leads to a wide range of adverse effects, and that policymakers should take these effects into account when trying to design an optimal policy. Readers interested in the full review can obtain it from sciencedirect.com. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

New Review Spotlights the Unintended Consequences of Rent Control2024-09-09T10:25:02-05:00

Post-Pandemic Square Foot Price Hikes End in 2023

2024-08-30T08:15:42-05:00

Median square foot prices (excluding record-high improved lot values) for new single-family detached (SFD) homes started in 2023 remained largely stable, according to NAHB’s analysis of the latest Survey of Construction data. For custom, or contractor-built, homes, the median price was $162 per square foot of floor space, not significantly different from $156 in 2022. For spec starts, after excluding lot values, the median was $150 per square foot of floor area. There remains a significant regional variation in square foot prices. In the spec market, after excluding lot values, median prices ranged from $262 per square foot in New England to $133 in the East South Central division.Contract prices of custom homes do not include the value of an improved lot as these homes are built on the owner’s land (with either the owner or a contractor acting as a general contractor). Consequently, contract prices are typically reported as lower than the sale prices of spec homes. To make the comparison more meaningful, the cost of lot development is excluded from sale prices in this analysis. The recent modest square foot price changes marked a sharp decline from the double-digit price hikes that characterized home building in the post-pandemic environment. Just a year prior, in 2022, increases for square foot prices in new SFD homes were approaching 20%, more than doubling the historically high U.S. inflation rate of 8%. The deceleration for median square foot prices reflects relatively stable building material prices and slower growth in home building wages in 2023. The shifts towards cost-effective methods, such as building homes on slabs rather than with full or partial basements, also contributed to decelerating median square foot prices.In the for-sale market, the New England division registered the highest and fastest rising median square foot prices. Half of new for-sale SFD homes started here in 2023 were sold at prices exceeding $262 per square foot of floor area, paid on top of the most expensive lot values in the nation. After showing slower appreciation in 2022-2023, the Pacific division came in second, with median prices of $216 per square foot. The most economical SFD spec homes were started in the South region, where the median sale prices per square foot were below the national median of $150. The East South Central division is home to the least expensive for-sale homes. Half of all for-sale SFD homes started here in 2023 registered square foot prices of $133 or lower, paid on top of the most economical lot values in the country. The other two divisions in the South – West South Central and South Atlantic –registered median prices of $144 per square foot, the second lowest in the nation. Because square foot prices in this analysis exclude the cost of developed lot, highly variant land values cannot explain the regional differences in square foot prices. However, overly restrictive zoning practices, more stringent construction codes and higher other regulatory costs undoubtedly contribute to higher per square foot prices. Regional differences in the types of homes, prevalent features and materials used in construction also contribute to price differences. In the South, for example, lower square foot prices partially reflect less frequent regional occurrence of costly new home features such as basements. In the custom home market, new contractor-built SFD homes in New England are by far the most expensive to build. Half of custom SFD homes started in New England in 2023 registered prices greater than $233 per square foot of floor area. The East North Central division came in second with the median of $199 per square foot of floor space. The median custom square foot price in the neighboring Mid Atlantic division was $183 per square foot. The Mountain division had similarly high custom square foot prices. Half of custom SFD started here in 2023 had prices of $184 per square foot or higher. The corresponding median price in the neighboring Pacific was $167 per square foot. The West South Central and South Atlantic divisions are where the most economical custom homes were started in 2023 with half of new custom homes registering prices at or below $136 and $138 per square foot of floor space, respectively. The remaining division in the South – East South Central – recorded slightly higher median square foot contract prices of $145 – still below the national median of $162. Typically, contractor-built custom homes are more expensive per square foot than for-sale homes after excluding improved lot values. Over the last two decades, this custom home premium averaged slightly above 9%, suggesting that new custom home buyers are not only willing to wait longer to move into a new home, but also pay extra for pricier features and materials. However, these custom home premiums (see the chart below) largely disappeared in the post-pandemic environment characterized by supply chain disruptions, skyrocketing building materials costs and home prices setting new records monthly. In 2023, the custom home premium averaged 8%, close to its historic norm, suggesting that this recent trend reversed, and once again custom home buyers are likely to pay more for pricier features and materials. The NAHB estimates in this post are based on the Survey of Construction (SOC) data. The survey information comes from interviews of builders and owners of the selected new houses. The reported prices are medians, meaning that half of all builders reported higher per square foot prices and the other half reported prices lower than the median. While the reported median prices cannot reflect the price variability within a division, and even less so within a metro area, they, nevertheless, highlight the regional differences in square foot prices. For the square footage statistics, the SOC uses all completely finished floor space, including space in basements and attics with finished walls, floors, and ceilings. This does not include a garage, carport, porch, unfinished attic or utility room, or any unfinished area of the basement. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

Post-Pandemic Square Foot Price Hikes End in 20232024-08-30T08:15:42-05:00

The Rise of White-Collar Jobs in Construction

2024-08-27T08:20:50-05:00

Analysis of the history of data from the American Community Survey (ACS) reveals dramatic shifts in the makeup of the construction labor force over the last two decades. While the overall count of workers in the industry now approaches the historic highs of the housing boom of 2005-2006, the share of tradesmen declined from 71% in 2005 to under 61% in 2022. At the same time, the share of computer, engineering, and science occupations doubled, and the share of management and business occupations increased 60%. The results are noteworthy, particularly given a recent focus on relatively flat productivity growth in the construction sector. A growing count of engineering/tech workers would, on its face, suggest a boost to productivity. However, a decline for the share of workers associated with the trades could suggest declining productivity. Indeed, more workers in management and business occupations could be another impact of the rising regulatory burden associated with building. These findings and possible impacts deserve additional research attention given the need to supply more attainable housing to the market. As of 2022, the construction labor force exceeds 11.7 million, just slightly below the housing boom peak of 12 million. Construction trades (such as carpenters, electricians, painters, plumbers, laborers, as well as first-line supervisors) account for 7.1 million workers in the industry, or 60.7%. In contrast, there were 8.5 million construction tradesmen during the peak employment of 2006. The disappearance of more than a million craftsmen helps explain the persistent labor shortages reported by the NAHB/Wells Fargo Housing Market Index Survey. Over the same period, the construction industry absorbed a rising number of white-collar workers. The management ranks expanded from 1.2 million to 1.9 million workers, and their share increased from 10% to 16%. Business and financial occupations grew at similar rates. The number of engineers, architects and other science occupations doubled; they now account for close to 2.7% of the industry workforce. In contrast, the share of computer, engineering and science occupations was just 1.3% in 2005. Even though the prevalence of white-collar jobs in construction remains less common than in the US economy overall, their numbers and shares have been rising faster in construction since 2005. For example, while the share of computer, engineering, and science occupations doubled in construction, it increased only 40% in the overall US workforce. Similarly, whereas the management ranks increased 60% in construction, they grew at a slower rate for the US labor force and registered gains of 45% since 2005. The rising presence of white-collar workers in construction undoubtedly reflects evolving production technologies, an enhanced regulatory environment and more stringent building codes. The changing makeup of the construction workforce also coincides with the declining rates of self-employment in the industry and may reflect a shift towards larger construction firms. Larger building enterprises are better equipped to invest into new technologies and absorb higher overhead costs. The labor force statistics reported in the post are tabulated using the historic ACS Public Use Microdata Sample (PUMS). The ACS statistics are most comprehensive as they include payroll workers, as well as self-employed. As the common practice dictates, the labor force estimates count employed and those unemployed workers who look for jobs. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

The Rise of White-Collar Jobs in Construction2024-08-27T08:20:50-05:00

Building Material Price Growth Tracking Closely to 2023

2024-08-13T12:18:27-05:00

Inputs to residential construction, goods less foods and energy, decreased 0.04% over July according to the most recent Producer Price Index (PPI) report published by the U.S. Bureau of Labor Statistics (BLS). The index for inputs to residential construction, goods less food and energy, represents building materials used in residential construction. Compared to a year ago, the index is up 2.01% in July, marking the sixth straight month of above 2% growth. Just past the midpoint of 2024, the year-to-date (YTD) increase in the index is at 0.47%. This is slightly higher yet similar to the YTD growth rate for 2023, which was 0.44%. The seasonally adjusted PPI for final demand goods increased 0.62% in July, after decreasing a revised 0.36% in June. In July, the PPI for final demand energy increased 1.90%, final demand food also rose 0.61% and final demand goods, less food and energy, rose 0.24%. The BLS producer price indices measure the average change in selling prices that domestic producers receive for their output. The seasonally adjusted PPI for softwood lumber fell 1.04% in July after rising 3.29% in June. Softwood lumber prices were 13.12% lower than July 2023. The non-seasonally adjusted PPI for gypsum building materials increased 0.08% in July after no increase in June. Compared to last year, the index was up 4.25%, the highest yearly increase since April 2023 when the index was up 12.14%. The seasonally adjusted PPI for ready-mix concrete rose 0.03% in July after falling 0.15% in June. Monthly growth in prices for read-mix concrete has been relatively flat for four consecutive months after prices peaked in March. Over the year, ready-mix concrete prices were 5.05% higher than July 2023. The non-seasonally adjusted PPI for steel mill products fell for the second straight month, down 3.29% in July. Steel mill product prices are 13.99% lower than last year. Overall, steel mill product prices have fallen 36.99% since peaking back December of 2021. The non-seasonally adjusted special commodity grouping PPI for copper rose 0.56% in July after falling 2.79% in June. Over the year, the index was up 14.26%. This special commodity grouping of copper includes the following commodities: copper and nickel ores, copper cathode and refined copper, copper base scrap, secondary copper (alloyed and unalloyed), copper and brass mill shapes, copper wire and cable, and copper base castings (excluding die-castings). Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

Building Material Price Growth Tracking Closely to 20232024-08-13T12:18:27-05:00

Federal Tax Return Itemization and the Mortgage Interest Deduction

2024-08-01T09:20:59-05:00

Since the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, tax returns that itemize Schedule A deductions, such as the mortgage interest deduction (MID) , have fallen significantly with only 9.6% of all returns using an itemized deduction in tax year 2021. In 2017, the share of returns claiming an itemized deduction was 30.9%. Taxpayers who do not itemize their tax returns claim the standard deduction instead, and thus do not directly benefit from deductions such as the MID. Looking across different adjusted gross income — or AGI, which is a measure of total income minus adjustments, such as deductions — levels , the prevalence of itemizing has fallen for all AGI levels. In 2017, five AGI levels had over half of tax returns claiming an itemized deduction. In contrast, in 2021 (the latest published IRS Statistics of Income data) only the two highest AGI levels had over half of returns claiming an itemize deduction. The TCJA significantly increased the standard deduction and placed a limit of $10,000 on the state and local income tax (SALT) deduction . These two factors contributed to the trend of fewer itemized returns since 2017. Moreover, these changes explain why the use of the mortgage interest deduction has grown less progressive since 2017. Namely, the mortgage interest deduction can only be claimed through itemizing. So fewer itemizing taxpayers has led to fewer home owners utilizing the mortgage interest deduction, particularly at lower AGI levels. Standard Deduction vs. Itemized Deduction The total number of returns filed in 2021 was 159.5 million, while the number of returns with itemized deductions stood at just 14.8 million returns. These returns totaled an estimated $659.7 billion in itemized deductions. The total amount of the standard deduction claimed stood at an estimated $2.5 trillion in 2021 — well above the itemization amount, as significantly more taxpayers utilized the standard deduction. Depicted in the graph above, there is a distinctive difference between the share of returns in a particular AGI level and its proportion of the total adjusted gross income. Levels below $100,000 constitute 77.2% of all returns, but only make up 30.9% of the total adjusted gross income. Levels above $100,000 constitute 22.8% of all returns while making up 69.1% of the total adjusted gross income. Among returns that utilized the itemized deduction, most fell in the $100,000-$200,000 AGI class, with 30.4% claiming itemized returns. Despite this, the $1 million AGI level make up 29.6% of the total itemization deduction amount — the highest level of deduction amounts — but only constituted 4.1% of itemized returns. In contrast to the itemized tax returns, most tax returns claiming the standard deductions were in the lower AGI range between $1-100,000 (75.3%). This AGI range also received the highest share of the total standard deduction amount (75.4%). The standard deduction return distribution follows more closely to that of all returns when compared to itemized returns as far fewer taxpayers utilize itemized deductions and those who do tend to be in higher income groups. Mortgage Interest Deduction After the passage of the 16th amendment, the first income tax code written by Congress allowed for the deduction of interest paid on many debts ranging from business to personal debts, including mortgages. The mortgage interest deduction notably expanded following World War II. Homeownership became an important wealth building tool for a vast majority of Americans during this period. The current principal limit of the mortgage interest deduction stands at $750,000 ($375,000 if married filing separately or for single taxpayers), meaning taxpayers can deduct interest on the first $750,000 of debt secured by the taxpayer’s main home or second home . Interest on home equity loans and lines of credit are deductible only if the funds are used to buy, build or substantially improve a taxpayer’s home up to a $100,000 limit. After the expiration of the 2017 tax rules in 2025, the mortgage interest deduction will return to prior law, in which the principal limit was $1 million, and home owners will be allowed to deduct interest on the first $100,000 of home equity debt regardless of the purpose of the debt. (However, AMT rules complicate this general rule somewhat.) It is important to note that the current principal limit is not indexed for inflation, which is a policy shortcoming given the post-COVID rise in home prices. Among tax returns that were itemized in 2021, 11.5 million (76.6%) claimed the mortgage interest deduction. The total amount of mortgage interest deducted was $143.5 billion, which includes points. (If debt predates 2017, deduction is allowed for points) According to the Bureau of Economic Analysis, total mortgage interest paid in 2021 — deducted and non-deducted together — was $458.2 billion , which amounts to around 31.3% of total mortgage interest payments claimed as a tax deduction in 2021. Across income groups, the group with the highest mortgage interest deduction  amount was for incomes between $100,000-$200,000 at a 28.9% share of the total. The $200,000-$500,000 income group deducted the second largest share at 27.9%. Nonetheless, the vast majority (84.9%) of mortgage interest deducted was from itemizers with incomes under $500,000. Given that it is much more likely for itemizers to be from higher income groups, specifically AGI levels greater than $500,000, it is perhaps surprising that most of the mortgage interest deduction claimed accrued to individuals making less than $500,000 as these taxpayers typically use itemized deductions less frequently. Proposal to Expand the Mortgage Tax Benefit: A Tax Credit In 2021, there were an estimated 83.4 million owner-occupied housing units with 51.1 million holding a mortgage. A housing tax credit would allow vastly more households to receive a tax benefit from owning a home than, as only approximately 11 million currently do by deducting mortgage interest on their tax returns. With fewer taxpayers itemizing, what was once an effective and broadly claimed tax incentive no longer serves its original purpose to make homeownership more affordable for the middle-class. NAHB believes the mortgage interest deduction should be updated to reflect today’s tax code and better serve the segment of prospective home owners who face unprecedented affordability challenges. A well-structured housing tax incentive, such as a mortgage interest credit, would help achieve this policy goal. NAHB supports converting the mortgage interest deduction into a targeted, ongoing homeownership tax credit, which could be claimed against mortgage interest and property taxes paid. A tax credit that is properly targeted would increase progressivity in the tax code and promote housing opportunity by providing a tax incentive more accessible to lower and middle-class households, as well minority and first-generation home buyers. Such a credit would provide a benefit to all home owners who pay mortgage interest and have income tax liability to offset. Such a proposal should be considered today and given serious consideration during the 2025 tax debate. Discover more from Eye On Housing Subscribe to get the latest posts sent to your email.

Federal Tax Return Itemization and the Mortgage Interest Deduction2024-08-01T09:20:59-05:00

Lot Values Trend Higher

2024-07-10T07:57:49-05:00

Lot values for single-family detached spec homes continued to rise, with national values reaching a new high in 2023, according to NAHB’s analysis of the Census Bureau’s Survey of Construction (SOC) data. The U.S. median lot value for single family detached for-sale homes started in 2023 stood at $58,000, with half of the lots valued higher and half of the lots valued lower than the median. Even though lot values continued to rise, overall U.S. inflation averaged 4.1% in 2023 and outpaced lot appreciation. When adjusted for inflation, median lot values remain below the record levels of the housing boom of 2005-2006. At that time, half of the lots were valued at or over $43,000, which is equivalent to about $65,000 when converted into inflation-adjusted 2023 dollars. It is important to keep in mind that new spec home construction experienced dramatic shifts towards smaller lots in recent years. Since the housing boom of 2005-2006, the share of lots under 1/5 of an acre rose from 48% in 2005 to 65% in 2023. So even though current median lot values are not record high in real terms, they reflect a very different mix of lots compared to the housing boom years or even a decade ago.  The fact that lot values keep rising as their sizes shrink reflects ongoing challenges builders face in obtaining lots. Even though lot shortages are not quite as widespread as they were in 2021, their current incidence recorded by the May 2023 survey for the NAHB/Wells Fargo Housing Market Index (HMI) is the second highest on record since NAHB began collecting this information in 1997. There is a substantial variation in lot values and appreciation across the US regions. New England has been a division with the most expensive lots for decades. Most recently, it has been in a league of its own with its median lot prices more than tripling the national medians in 2023. As of the latest SOC data, half of all single-family detached (SFD) spec homes started in New England in 2023 were built on lots valued at or over $200,000. New England is known for strict local zoning regulations that often require very low densities. As a matter of fact, the median lot size for single-family detached spec homes started in New England in 2023 was almost 3 times the national median. Therefore, it is not surprising that typical SFD spec homes in New England are built on some of the largest and most expensive lots in the nation. The Pacific division has the smallest lots. However, its median lot value reached $147,000 in 2023, the second highest median in the nation. As a result, Pacific division lots stand out for being the most expensive in the nation in terms of per acre costs. The neighboring Mountain division hit a new record high, with half of the lots for SFD spec home starts valued at or more than $90,000. This made the Mountain division lots the third most expensive in the US. The East South Central and South Atlantic divisions are home to some of the least expensive spec home lots in the nation. The East South Central division recorded the lowest median lot value, with half of SFD spec homes started in 2023 registering lot values of $46,000 or less. Typical lots here are also significantly larger than the national median, thus defining some of the most economical lots, as well as lowest per acre costs in the US. The neighboring South Atlantic is the only other division where the median lot value ($49,000) is below the national median of $58,000. Lots in the West South Central, which includes Texas, appreciated dramatically during the last decade.  In 2012, half of the SFD spec homes were started on lots valued at or below $30,000, half of the current median of $61,000.  For this analysis, median lot values were chosen over averages, since averages tend to be heavily influenced by extreme outliers. In addition, the Census Bureau often masks extreme lot values on the public use SOC dataset making it difficult to calculate averages precisely, but medians remain unaffected by these procedures. This analysis is limited to single-family speculatively built homes by year started and with reported sales prices. For custom homes built on an owner’s land with either the owner or a builder acting as the general contractor, the corresponding land values are not reported in the SOC. Consequently, custom homes are excluded from this analysis. Discover more from Eye On Housing Subscribe to get the latest posts to your email.

Lot Values Trend Higher2024-07-10T07:57:49-05:00

Share of Smaller Lots Is at New High

2024-07-09T08:25:49-05:00

Close to two thirds (65%) of new single-family detached homes sold in 2023 were built on lots under 9,000 square feet, which is less than 1/5 of an acre. According to the latest Survey of Construction (SOC), this is the highest share on record and reflects stark changes in the lot size distribution over the last two decades. In 1999, when the Census Bureau started tracking these series, less than half (46%) of new for-sale single-family detached homes were occupying lots of that size.A shift in speculatively built (or spec) home building towards smaller lots continued despite the pandemic-triggered suburban flight and presumed shifts in preferences towards more spacious living. The steadily rising share of smaller lots undoubtedly reflects unprecedented lot shortages confronted by home builders during the pandemic housing boom, as well as their attempts to make new homes more affordable. Zooming in on lots smaller than 7,000 square feet (or 0.16 of an acre) reveals another record reading, as share of these lots reached 40% in 2023. In sharp contrast, only 28% of new single-family detached spec homes were built on lots of that size in 1999, when the Census started tracking these data. A persistent shift towards smaller lots, however, is a more recent phenomenon. The share of lots under one fifth of an acre was fluctuating around 48%, never crossing the 50% mark, until 2011. It was only during the last decade that the share rose rapidly, from 50% in 2011 to 61% right before the pandemic and gained an additional 4 percentage points during the last four years. A closer look at the lot size distribution since 2010 shows that most dramatic shifts took place at the lowest end, with lots under 0.16 acres increasing their share by 13 percentage points. In 2010, 27% of all sold single family detached homes occupied lots under 0.16 acres and an additional 20% were on lots between 0.16 and 0.25 acres. Fast forward to 2023, these shares increased to 40% and 25%, respectively. At the other end of the lot size distribution, the share of spec homes built on larger lots exceeding half an acre shrunk from 14% in 2010 to 9% in 2023. The share of lots measuring between a quarter and half an acre declined from 24% to 18% over that time span. The median lot size of a new single-family detached home sold in 2023 now stands at 8,400 square feet, or just under one-fifth of an acre. This is slightly larger but statistically not different from the lowest on record median of 8,177 square feet set a year before the COVID-19 pandemic. While the nation’s production of spec homes shifts towards smaller lots, the regional differences in lot sizes persist. Looking at single-family detached spec homes started in 2023, the median lot size in New England is almost 3 times larger than the national median. New England is known for strict local zoning regulations that often require very low densities. Therefore, it is not surprising that single-family detached spec homes started in New England are built on some of the largest lots in the nation, with half of the lots exceeding 0.56 of an acre. The East South Central division is a distant second on the list with the median lot occupying just under a third of an acre. In the South, the West South Central division stands out for starting half of single-family detached spec homes on lots under 0.15 acres. This is half the size of typical lots in the neighboring East South Central division. The Pacific division where densities are high and developed land is scarce has the smallest lots, with half of the lots being under 0.14 acres. The bordering Mountain division also reports typical lots smaller (0.16 acres) than the national median. The analysis above is limited to single-family detached speculatively built homes. Custom homes built on an owner’s land with either the owner or a builder acting as the general contractor do not involve the work of a professional land developer subdividing a property. Therefore, in the case of custom homes, lots refer to an owner’s land area rather than lots in a conventional sense. Nevertheless, the SOC reports lot sizes for custom homes and shows that they tend to have larger lots. The median lot size for custom single-family detached homes started in 2023 is one acre. For the regional analysis, the median lot size is chosen over average since averages tend to be heavily influenced by extreme outliers. In addition, the Census Bureau often masks extreme lot sizes and values on the public use SOC dataset making it difficult to calculate averages precisely, but medians (as the midpoint of a frequency distribution) remain unaffected by these procedures. Discover more from Eye On Housing Subscribe to get the latest posts to your email.

Share of Smaller Lots Is at New High2024-07-09T08:25:49-05:00

CBO Boosts Deficit Estimate By 27%

2024-06-28T08:15:55-05:00

The budget deficit in 2024 is expected to total $1.9 trillion, according to the Congressional Budget Office’s most recent June estimates. This marks a $408 billion increase from the $1.5 trillion estimate published in February. This increase is the result of increased spending of $363 billion and decreased revenues of $45 billion for the year.   For the 2025-2034 period, the forecasted cumulative deficit was revised upwards by $2.1 trillion to $22.1 trillion over the period. This increase in the estimated deficit primarily comes from spending enacted this year that is expected to continue and rise with inflation. As a share of GDP, the annual deficit in 2024 is expected to be 6.7% and rise to 7.1% by 2034. Net interest cost is expected to increase from 3.1% of GDP this year to 4.1% by 2034. Net interest spending is expected to total $892.3 billion in 2024, surpassing discretionary defense spending. By 2034, net interest spending is expected to be $1.7 trillion. Primary deficits (deficits excluding net interest spending) remain larger than historical levels, reaching 2.8% of GDP by 2034. Between 1947 – 2008, primary deficits have only exceeded 2.5% of GDP twice, while over the past 15 years they have exceeded 2.5% ten times. When the Federal Reserve began raising the federal funds rate in 2022, interest rates increased significantly, including rates on U.S. Treasuries. These higher interest rates have a direct impact on higher net interest costs over the next ten years for federal spending. From the CBO: “In CBO’s projections, about two-thirds of the growth in net interest costs from 2024 to 2034 stems from increases in the average interest rate on federal debt, and one-third reflects the larger amount of debt.” Federal Debt Total debt held by the public is expected to be $28.2 trillion at the end of 2024 and rise to $50.7 trillion by 2034. As a share of GDP, debt held by the public is 99.0% in 2024 and rises to 122.4% by 2034. This marks a 6.4 percentage point increase from the February estimate of the debt-to-GDP ratio. Shown below in blue, June estimates are projected higher than the February estimates except for 2025. Economic changes to the CBO’s estimates, which are changes to the macroeconomic forecasts that the CBO uses in its budget projections, resulted in decreasing the cumulative deficit between 2025-2034 by a relatively small $0.6 trillion. Recent legislative changes increased the cumulative deficit by $1.6 trillion, while technical changes (changes that are neither economic nor legislative) increased the cumulative deficit by $1.1 trillion. Updates to Housing Among the economic changes, there are two major takeaways related to housing. The first being increases to growth in real residential investment. The CBO’s forecast of real residential fixed investment growth has been updated significantly higher. Real residential fixed investment consists of new residential construction, remodeling expenditures, brokers’ commission, and residential equipment such as furniture or household appliances. Looking at the July 2020 CBO release, real residential fixed investment was forecasted at under 3% annualized growth for every quarter in 2025 and 2026. This estimate has been increased to over 6% for each quarter of 2025-2026, peaking at 10.9% in the first quarter of 2026 (see chart below). This increase in projected residential fixed investment is due to increases in immigration and projected declines in mortgage rates in both 2025 and 2026, which will both increase demand for housing during those years. The revised CBO outlook reflects the ongoing housing deficit in the U.S. The other economic change of note was related to individual income taxes. Economic changes increased revenues for the federal government by $612 billion between 2025-2034. The CBO notes that lower mortgage interest payments are a factor as to why revenues increased over this period. “Projected receipts from individual income taxes increased in the later years of the period because CBO lowered its estimates of the amount of interest paid on mortgages. Mortgage interest payments now average 2.3 per­cent of GDP over the 2025–2034 period, down from 2.8 percent in the February forecast. Mortgage interest is generally deductible for taxpayers who choose to itemize deductions.” One point here worth considering regarding mortgage interest is the used term “generally deductible”. Taxpayers must itemize deductions to claim the mortgage interest deduction. According to IRS data, returns that itemize deductions have fallen from 31% in 2017 to just 9% in 2021. The Tax Cuts and Jobs Act (TCJA) passage in 2017 reduced the number of itemizing returns by raising the standard deduction, which in turn reduced the use of the mortgage interest deduction across all taxpayers. Additionally, the mortgage interest deduction can only be applied to the first $750,000 of mortgage debt for a joint return, which is down from the pre-TCJA level of $1,000,000 in mortgage debt. Given that this amount is not indexed for inflation, the deductions significance has eroded since 2017 given high levels of shelter inflation over the past few years. Interest Rates The CBO forecasts the Federal Reserve to cut the federal funds rates starting in the first quarter of 2025 as inflation continues to fall and unemployment rises. The CBO estimate shows the Federal Reserve then continuing to cut the fed funds rate to around 3% by 2028 and remains level through the following years. As the fed funds rate declines, 3-month treasury bill rates follow reaching just below 3% in 2028. The 10-year treasury note rate is expected to decline more slowly than short term rates, given they are typically higher. Between the first quarter of 2024 and 2028, the 10-year rate is forecasted by CBO to fall 0.5 percentage points, while the 3-month bill rate is expected to fall 2.3 percentage points. Over the long run and due to rising debt levels, the 10-year rate is forecasted to rise to 4.1% by 2034. In the coming years, builders and home buyers need to monitor and be prepared to take part in government finances. Higher debt and continually large deficits will lead to higher nominal interest rates, which continue to negatively impact builder financing costs, mortgage rates, and overall housing affordability. Discover more from Eye On Housing Subscribe to get the latest posts to your email.

CBO Boosts Deficit Estimate By 27%2024-06-28T08:15:55-05:00

State & Local Tax Revenues: 2024 First Quarter Analysis

2024-06-24T10:18:29-05:00

The Census Bureau’s quarterly summary of State & Local Tax Revenue shows a 1.7% increase in property taxes paid, rising from a revised estimate of $754.1 to $766.7 billion in the seasonally adjusted four quarters ending in the first quarter of 2024. The rate of quarterly increases ticked up slightly, up from 1.5% in the fourth quarter of 2023 to 1.7% in the first quarter of 2024. This was the sixth straight quarter where the quarterly percentage increase was above the historical average since 2011 of 0.9%. Year-over-year, property tax revenue was 8.9% higher. This was the third straight decease in the year-over-year rate of change in the property tax data. Despite this, the first quarter of 2024 still experienced a year-over-year increase that is double what it has historically been. Property tax share of total State & Local tax collections in the first quarter stood at 37.9%, up a marginal 0.3 percentage points from the previous quarter. This share had been trending upward since the third quarter of 2022 when it was at 33.7%. Of total collections, property tax made up the largest share, followed by sales at 28.4%. Individual income tax represented 25.2% of tax revenue while corporate tax made up the remaining 8.4% of revenues for state & local governments in the first quarter of 2024. Discover more from Eye On Housing Subscribe to get the latest posts to your email.

State & Local Tax Revenues: 2024 First Quarter Analysis2024-06-24T10:18:29-05:00

Residential Building Material Prices Remain Relatively Unchanged in May

2024-06-13T11:17:19-05:00

Inputs to residential construction, goods less food and energy, fell 0.09% over the month according to the most recent producer price index (PPI) report published by the U.S. Bureau of Labor Statistics. The index for inputs to residential construction, goods less food and energy, represents building materials used in residential construction. This was the first decrease in the index since October of last year. While the index fell over the month, it was 2.91% higher than May of last year.   The seasonally adjusted PPI for final demand goods decreased 0.78% in May, after increasing a revised 0.41% in April. This was the largest decrease in the index for final demand goods since a 1.24% decline in October of last year. According to BLS, around 60% of the monthly decline in May was due to a 7.11% drop in the index for gasoline.  The PPI for final demand energy and final demand foods both fell at 4.76% and 0.10% respectively. At the same time, the PPI for final demand goods, less foods and energy, rose 0.26%. The seasonally adjusted PPI for softwood lumber fell for the first time since February, down 5% over the month. Prices for softwood lumber remain lower than last year at 8.10% below May of 2023. It was the 19th consecutive month where the softwood lumber index was lower than one year ago. The non-seasonally adjusted special commodity grouping PPI for copper rose 8.47% in May after rising 3.44% in April. Over the year, the index was up 17.14%. Given the global goals of electrification, copper is an important commodity for many electrical goods given its efficient conductivity properties. A recent report from the International Energy Agency shows that copper mine supply levels will not meet future demand. Expected total demand of copper is expected to outpace future expected supply by 43.38% by 2040. The non-seasonally adjusted PPI for gypsum building materials was unchanged over the month but was up 2.09% over the year. Price growth for gypsum building materials has slowed from the growth we saw during the pandemic and has remained muted from about the second half of 2022. The seasonally adjusted PPI for ready-mix concrete fell for the second consecutive month, down 0.13% in May after falling from 0.9% in April. Ready-mix concrete remains well above last year’s level, up 5.65% since a year ago. The non-seasonally adjusted PPI for steel mill products rose 0.54% in May after falling in the two previous months. Year-over-year, steel mill product prices were lower than one year ago for the third straight month, down 13.81% from May of last year. Discover more from Eye On Housing Subscribe to get the latest posts to your email.

Residential Building Material Prices Remain Relatively Unchanged in May2024-06-13T11:17:19-05:00
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