Anyone buying or selling a home in New Hampshire recently can attest that the supply of available existing homes has never been tighter relative to demand, with the result that prices are at all-time highs. A report by the New Hampshire Housing Finance Authority indicates that MLS listings in May 2021 were down 23% from a year earlier, while the New Hampshire Association of Realtors reports that the median price of single family home in May 2021 hit a record high of $402,000 (25.7% higher than May 2020).
One would expect the shortage of inventory and high prices of existing homes to spark a boom in new residential construction. There has certainly been a decent amount of such activity; the U.S. Census Bureau reports that in the first five months of 2021 a total of 1,933 new building permits were issued in New Hampshire, 80% of them for single family homes. But skyrocketing lumber and material prices, coupled with a labor shortage in the construction field, have tempered the boom.
These drags won’t last, as market forces work out the blips. An easing of tariffs on Canadian lumber would certainly help (over 80% of U.S. lumber imports come from Canada), but lumber prices are already on the way down. The labor shortage created by COVID-19 should ease with the decline of the pandemic, nudged a bit by New Hampshire’s recent opt out of federal unemployment benefits, and by the use of Paycheck Protection Program (PPP) loan money, which is forgivable tax free to recipients who use at least 60% of it on payroll. Wages may go up, but so will employment.
In the long term, I also see some positive incentives to residential construction as a result of tax and monetary policies:
On June 21 Governor Sununu signed into law HB-154, which enables municipalities to offer community revitalization tax incentives for the construction of low-income housing. Until now the tax incentives were limited to construction/rehabilitation projects in downtown or town center areas. Effective in 2022, the new law allows the tax break for developers of affordable housing in designated “housing opportunity zones” anywhere in the municipality’s borders. Tax assessment relief is now available to developers for ten years rather than the present five.
HB-2, the new biennial budget signed into law by Governor Sununu on June 25, gradually reduces the interest and dividends tax rate and eliminates the tax entirely by 2027. The current rate under RSA 77:1 is 5%, levied on all interest and dividend income above $2,400 in any year. For 2023 that rate will be 4%, declining to 3%, 2% and 1% in each of the next three years, and eliminated entirely for 2027 and beyond. This will make New Hampshire a truly “no income tax” state (did you think it already was?), and a more attractive place for the wealthy to live and retire – a shot in the arm for high end residential construction.
On the federal level, the $10,000 cap on deductions for state and local taxes (SALT) – which in New Hampshire is virtually entirely property taxes – is set to expire in 2025. But it could happen sooner, as bipartisan support for repealing or at least increasing the cap is waxing. That would inject a shot in the other arm for high end residential construction.
Perhaps the most important spur to residential construction is interest rates. Inflation fears in recent months have led to predictions that the Fed would begin to raise interest rates this year. The Fed Chairman’s testimony before Congress last week has now eased concerns that inflation alone might motivate a rate hike. None of the prognosticators as of this writing are predicting much of a spike in rates. As long as those rates stay low, housing affordability stays in the positive zone.
These are promising times for New Hampshire home builders. But let the buyer beware. Unscrupulous contractors who abscond with deposits are out there. The Consumer Protection Bureau of the Attorney General’s Office reports on several who have been indicted on Class A felonies in recent months for doing exactly that.
One would expect the shortage of inventory and high prices of existing homes to spark a boom in new residential construction. There has certainly been a decent amount of such activity; the U.S. Census Bureau reports that in the first five months of 2021 a total of 1,933 new building permits were issued in New Hampshire, 80% of them for single family homes. But skyrocketing lumber and material prices, coupled with a labor shortage in the construction field, have tempered the boom.
These drags won’t last, as market forces work out the blips. An easing of tariffs on Canadian lumber would certainly help (over 80% of U.S. lumber imports come from Canada), but lumber prices are already on the way down. The labor shortage created by COVID-19 should ease with the decline of the pandemic, nudged a bit by New Hampshire’s recent opt out of federal unemployment benefits, and by the use of Paycheck Protection Program (PPP) loan money, which is forgivable tax free to recipients who use at least 60% of it on payroll. Wages may go up, but so will employment.
In the long term, I also see some positive incentives to residential construction as a result of tax and monetary policies:
On June 21 Governor Sununu signed into law HB-154, which enables municipalities to offer community revitalization tax incentives for the construction of low-income housing. Until now the tax incentives were limited to construction/rehabilitation projects in downtown or town center areas. Effective in 2022, the new law allows the tax break for developers of affordable housing in designated “housing opportunity zones” anywhere in the municipality’s borders. Tax assessment relief is now available to developers for ten years rather than the present five.
HB-2, the new biennial budget signed into law by Governor Sununu on June 25, gradually reduces the interest and dividends tax rate and eliminates the tax entirely by 2027. The current rate under RSA 77:1 is 5%, levied on all interest and dividend income above $2,400 in any year. For 2023 that rate will be 4%, declining to 3%, 2% and 1% in each of the next three years, and eliminated entirely for 2027 and beyond. This will make New Hampshire a truly “no income tax” state (did you think it already was?), and a more attractive place for the wealthy to live and retire – a shot in the arm for high end residential construction.
On the federal level, the $10,000 cap on deductions for state and local taxes (SALT) – which in New Hampshire is virtually entirely property taxes – is set to expire in 2025. But it could happen sooner, as bipartisan support for repealing or at least increasing the cap is waxing. That would inject a shot in the other arm for high end residential construction.
Perhaps the most important spur to residential construction is interest rates. Inflation fears in recent months have led to predictions that the Fed would begin to raise interest rates this year. The Fed Chairman’s testimony before Congress last week has now eased concerns that inflation alone might motivate a rate hike. None of the prognosticators as of this writing are predicting much of a spike in rates. As long as those rates stay low, housing affordability stays in the positive zone.
These are promising times for New Hampshire home builders. But let the buyer beware. Unscrupulous contractors who abscond with deposits are out there. The Consumer Protection Bureau of the Attorney General’s Office reports on several who have been indicted on Class A felonies in recent months for doing exactly that.
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