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Red States vs. Blue States: What's the State of the Union in 2018 Real Estate?

Friday, February 2, 2018

By Cicely Wedgeworth, Realtor.com

On Tuesday, President Donald Trump delivered his first State of the Union address, the annual check-in for the head of state to outline how the country is doing and what he's planning for the year ahead. Here at realtor.com, we thought we'd do something similar – but for real estate, of course.

While the news for the economy is solidly upbeat, with low unemployment and steady job growth, that isn't necessarily helping homebuyers who face high prices and a limited inventory of homes for sale. A lot of the major factors that have been affecting home availability and prices are still going strong – but hold on! Changes being enacted by the new administration will likely have an affect in the year ahead.

The most notable of those changes, of course, was the tax law that the Republicans pushed through in the last days of 2017. The debate over the legislation was highly polarized between Democrats and Republicans, and its effects may be skewed as well.

Last year, blue states saw higher home-price growth, at 9.1%, than red states, at 5.9%. They also saw stronger sales growth, at 1.6%, than red states, at 0.7%.

The main reason driving the higher price appreciation in blue states is that they tend to have more urban and suburban communities – especially California, Illinois, and the tri-state region of New York, New Jersey, and Connecticut – than the largely rural red states. Further property development in these built-out areas is extremely challenging; there simply isn't much influx of new housing to meet buyer demand.

And the outlook for blue states in 2018 isn't so rosy, either, especially in the wealthier enclaves. The new tax law eliminates the interest deduction on mortgages greater than $750,000. That fits the bill of 2.5% of mortgages in blue states, compared with 0.4% of mortgages in red states.

“The new tax law that caps the mortgage interest deduction and the deductibility of state and local taxes can be expected to impact the upper-end market in 2018 – precisely how and the extent of which remain to be seen,” said Joe Kirchner, senior economist for realtor.com.

Other than that, though, the lack of inventory and strong demand from buyers (including plenty of first-timers eager to put in a bid) are still key dynamics in the 2018 housing market.

“The macro factors that have defined real estate in recent years – strong demand and weak supply – continue to set the tone,” Kirchner said.

Inventory fell 8.8% nationally in the 12 months ending Dec. 31, 2017, compared with a 10.7% dip the previous year. There was a sharp increase in new construction – single-family housing starts jumped 8.4%, and 10.2% the previous year – but it just wasn't enough to offset inventory shortages. That's likely why sales of existing U.S. homes actually cooled, increasing only 1.1% in 2017 compared with a 3.8% gain the previous year. On the other hand, prices appreciated 5.8% on average during 2017, compared with 5.1% a year earlier.

All this has been toughest on Millennials, who are buying more starter homes than any other group. While they're moving up in their careers and starting families – typical life events that would lead people to buy a home – in 2017, they often found themselves hitting the wall of tighter-than-tight inventory levels. With the majority of new construction in mid- to upper-tier price points, new homes have provided very limited relief to these would-be homeowners.

The solution may lie in the hands of developers, Kirchner said.

“Builders will need to focus more on homes geared for moderate incomes, and partner with the government on initiatives to transform distressed urban neighborhoods and overcome labor shortages,” he said.

Cicely Wedgeworth is the deputy managing editor of realtor.com. She has worked as a writer and editor at Yahoo, the Los Angeles Times, and Newsday.

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