US housing market 'cooling' when it could be booming: SALT cap to blame?

Conditions are prime for prospective homebuyers, but Americans don’t appear too keen on getting into the market.

Single-family home sales fell for a second consecutive month in May – down 7.8 percent from the year prior.

During May, the median price of a new house declined 2.7 percent year over year, to $308,000.

Meanwhile, mortgage rates have dropped into the 3 percent range, recently hitting their lowest level since late-2016. The Federal Reserve has signaled it could cut rates as soon as this month.

Additionally, the unemployment rate that is hovering near its lowest level in 50 years – and strengthening consumer confidence numbers should also be urging people into the market.

So what’s going on?

According to a new note from experts at Deutsche Bank Research, a change made via the Tax Cuts and Jobs Act could be negatively affecting the market – the $10,000 cap on state and local tax (SALT) deductions.

Additionally, via the Tax Cuts and Jobs Act, the mortgage interest deduction was capped. Taxpayers who itemize (fewer individuals after the standard deduction was doubled) can deduct mortgage interest on up to $750,000 worth of debt accrued from a home purchase. Prior to the passage of the tax reform law, taxpayers could deduct interest on up to $1 million.

The SALT cap appears to be having an effect on markets in high-tax states. In fact, single-family home sales plummeted in the West, and dropped significantly in the Northeast, during the month of May.

As previously reported by FOX Business, home prices in Manhattan have been falling at the fastest rate since the financial crisis. In 2019, prices are down about 5 percent year over year. Sales in the first quarter were down 2.7 percent year over year, according to research from Douglas Elliman.

Further, despite an expected rush to close before the onset of those new tax rates in July, overall Manhattan apartment sales still weakened in the second quarter.

It’s not just Manhattan feeling the pain, however. Pricey homes in the luxurious Hamptons are also starting to lose their value.

According to the report from Douglas Elliman from the first quarter of 2019, the high-end housing market experienced its “slowest conditions” since the financial crisis. The first quarter recorded the lowest number of first-quarter sales since 2012, an uptick in inventory and a larger share of sales below the $1 million mark. Sales were down 19.3 percent from the previous quarter, while the median sale price fell 5.5 percent to $850,000.

But there may be an even larger problem lurking, according to St. Louis Federal Reserve economist William R. Emmons.

Emmons said “weakening” in all regions of the country appears “similar” to periods preceding the 1990-91 and 2001 recessions.

He said that three housing-related indicators point to a possible recessions later this year, or in early 2020.

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Emmons noted that, as of May, home-sales momentum indicators were down across all regions of the country and were weaker than those seen in the year before the 2001 recession.