An Indirect Benefit from Tax Reform to Entry-Level Buyers as Insurance Rates are Cut

Friday, April 20, 2018 by Zelman & Associates

Filed under: affordability entry-level mortgage

Earlier this year, we dissected the impact of tax cuts on net income for different income cohorts, noting that the average individual tax filer would experience an approximate 1.5% increase in after-tax cash flow in 2018, compounding modest improvement in pre-tax wage growth. Although this positively influenced affordability for potential entry-level homebuyers, since that time, mortgage rates have risen and more recently the cost of private mortgage insurance was cut. Following, we analyze these various moving pieces.

According to our analysis of income tax records and mortgage data, we estimate that the average entry-level homebuyer in 2017 earned approximately $55,000 before taxes, implying that net cash flow in 2018 should increase by approximately $60 per month.

While this would provide a solid boost to home purchasing power, the rise of mortgage rates has an offsetting impact. In 2017, the average 30-year fixed mortgage rate approximated 4.00%. Based on year-to-date rates and the outlook for the remainder of the year, we believe that the average rate will be closer to 4.45% in 2018. All else equal, the 45 basis point increase in financing costs would equate to $55 more per month in principal and interest for the typical entry-level home.

It would be wrong to assume that all tax savings would be allocated to housing, but if it were, it would neutralize the effect of higher mortgage rates. Beyond these factors, MGIC Investment Corporation, the third largest private mortgage insurer announced last week that it “reduced borrower-paid premium rates that reflect the lower corporate tax rate signed into law in 2017.” In essence, the company passed on the entire benefit of corporate tax reform to its customers via a lower price for mortgage insurance. According to our math, the price cut would save the typical entry-level homebuyer another $15-30 per month.

Thus, tax cuts, higher interest rates and lower mortgage insurance premiums combine to improve affordability for aspiring entry-level homebuyers. Available for-sale inventory is still too tight, and thus home price appreciation is outstripping wage growth, but we believe that conversations today focus almost exclusively on the negative effects while overlooking the positives. Even after considering above-average home price appreciation and higher interest rates in 2018, our preferred entry-level affordability index would stand 12-13% more favorably than the 1990-99 and 2000-09 averages, leaving us confident in the ability of first-time homebuyers to qualify without stretching beyond their means.

An Indirect Benefit from Tax Reform to Entry-Level Buyers as Insurance Rates are Cut

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