Goldman Sachs reveals what’s holding back the housing market

Scott Gamm

Even with the slump in mortgage rates over the past year, there are still a few broader headwinds facing the housing market, particularly homebuilders.

That’s the assessment from Goldman Sachs, which just released an updated view of its housing market outlook.

Tax reform

The Tax Cuts and Jobs Act (TCJA) of 2017, which took effect in early 2018, sparked changes to how owner-occupied homes can be used to save money on taxes.

“The TCJA reduced the cap on principal for interest deductions on new mortgages from $1m to $750k, added a cap of $10k on state and local property and income tax deductions, and doubled the standard deduction, reducing the value of owner-occupied housing as a tax shield,” the analysts wrote in a note to clients, led by chief U.S. economist Jan Hatzius.

The reduced tax incentives effectively increases a home’s cost of ownership.

Construction labor market

While economists have viewed the tight labor market as one of the fuelers of economic growth, the tight labor market within the construction industry has created challenges for homebuilders.

“The second headwind for homebuilding is the very tight construction industry labor market,” the Goldman Sachs analysts wrote. “Construction in particular has struggled with slower growth of immigrant labor and falling interest in the industry among younger generations despite its increase in wages relative to manufacturing pay.”

Regulatory costs

Aside from labor, regulatory costs have begun to hit homebuilders’ bottom lines.

“The third headwind widely cited by homebuilders is a rise in the costs of land and of entitling and developing lots, as well as a continued increase in the time required to secure permits,” the analysts wrote. “These costs have climbed further recently, with many municipalities requiring developers to contribute more to funding for public amenities.”

The positives

Even with the aforementioned headwinds facing the housing market and homebuilders, shares of homebuilder stocks have performed quite well so far in 2019, with the S&P Homebuilders ETF (XHB), rising roughly 26%. Though in 2018, the sector plummeted roughly 27%.

Plus, mortgage rates have fallen sharply, helping to lower home ownership costs. The average 30-year fixed mortgage comes with a rate of 3.55%, according to Freddie Mac, compared to 4.51% at this time last year.

With this, Goldman Sachs notes that the housing market takes time to respond to a drop in mortgage rates, which suggests “the bulk of the boost [from low rates] is yet to come.”

Plus, lower rates also adds to the incentive for existing homeowners to refinance their mortgages to lock in lower rates.

“Lower interest rates are also having an impact on refinancing activity, suggesting that an additional modest boost via consumption channels is already materializing,” the analysts wrote.

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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