What's In Store for 2017 in the Housing Market
See what's in store for the 2017 housing market and as Amber Taufmen talks about the key takeaways and what 8 different experts forecast for the future.
- Mortgage rates are likely to continue to increase throughout 2017.
- There will not be any easing in inventory, and affordability will still be a challenge in big markets.
- The potential is there for a large number of first-time buyers to enter the buying market, but they will face new challenge
What will the 12 months encompassing 2017 hold in store for housing?
Inman asked eight different experts to give their take:
- Steve Cook, editor of Real Estate Economy Watch
- Doug Duncan, senior vice president and chief economist at Fannie Mae
- Mark Fleming, chief economist at First American
- Matthew Gardner, chief economist at Windermere
- Svenja Gudell, chief economist at Zillow
- Ralph McLaughlin, chief economist at Trulia
- Rodney Ramcharan, director of research at University of Southern California’s Lusk for Real Estate
- Jonathan Smoke, chief economist at realtor.com
Here’s what they told us.
We’ve been spoiled with historically low interest rates, which haven’t risen despite threats to do just that over the past few years. No more.
“The kind of rates we were getting earlier this year, down to 3.5 percent — those days are over,” said Cook.
Where will they go?
“We will likely still see volatility in mortgage rates over the next two, three, four months as [President-elect Donald] Trump unveils cabinet members and specific policies he wants,” said McLaughlin.
And the Federal Reserve is due to hike rates, too, which often puts pressure on mortgage rates one way or another. “I think in December we’ll see the Fed raising rates and we’ll see more Fed hikes in 2017, and with that, I wouldn’t be surprised if the 30-year fixed mortgage rate hits 4.75 percent,” said Gudell.
“I don’t believe we’ll see any pullback until after the inauguration, but even the best-case scenario suggests that the historically low rates that have been in place for the last few years are firmly in the rear-view mirror,” said Gardner. “My forecast is for the 30-year fixed rate to rise above 4.5 percent by year’s end, and worst case scenario, knock on the door of 5 percent.”
What does it mean?
“If income growth picks up, then the rise in interest rates will affect refinancing, but not the home purchase activity. If incomes start to grow more strongly, it probably won’t affect buying as much as refinancing,” he said.
“Just looking at the pricing data in terms of interest rates, the spike in interest rates should definitely slow things down,” said Ramcharan.
Fleming said that if mortgage rates get closer to 5 percent by the end of 2017, he would expect home sales to decline by about 4 percent from First American’s original projection — or by about 200,000 sales.
At what point would rising mortgage rates start to significantly dampen buyer demand?
“When I’ve looked at this topic historically in the past, what you tended to see was an absolute level that the market reacted to, and in years past that absolute level was closer to 6.5 and 7 percent,” said Smoke.
“But there are plenty of people who believe that because we’ve had a decade of historically low rates that the new threshold for that might be in the mid 5’s or even as low as 5 percent. So if we see them jump more than we’re anticipating, getting into the 5s, then we start to run into that issue.”
However, Smoke thinks that in the meantime, there’s a lot that buyers can do to mitigate the effects of rising rates, including looking for lower-priced homes, putting more money down or changing term lengths on a mortgage’s fixed-rate component.
“If Trump goes ahead with his infrastructure plan, which is probably a smart thing to do and a no-brainer as far as Congress is concerned, it will stimulate the economy and probably increase pressure on rates,” added Cook.
Housing inventory — or the lack thereof — was a big deal in 2016, and it will continue to be a problem next year, experts believe.
“Historically, you’d want to be much closer to a million homes built or sold, and we’re roughly at half of that, so I don’t think builders are going to have an easy time magically ramping up,” said Gudell.
Inventory will likely fluctuate by market and price point, too. “For people at high ends and expensive properties you may very well see a surge, and the expectation is that tax cuts will come,” said Ramcharan. “Prior to Trump being President-elect, there was a slowdown at the top end.”
How mortgage rates will influence inventory
Because most housing inventory comes from the existing market (as opposed to new construction), what potential sellers decide do in 2017 will have an impact on the market as a whole — and rising mortgage rates might not be great for sales.
“We’ve had effectively a 30-year tailwind run of declining mortgage rates,” said Fleming. “At this point in time, maybe they go up or down a little bit, but the long-term trend over the past 30 years has been lower and lower and lower mortgage rates.”
Consequently, existing homeowners with low mortgage interest rates might not be able to afford to move into a bigger house if it also comes with a higher rate.
“How do we address the fact that the existing homeowner, the largest single source of housing supply, has a built-in financial disincentive to make that supply move?” asked Fleming. “You’re making that decision to supply as a function of what you can afford to buy, but all else held equal, because you lose that low rate and have to get a new mortgage at a higher rate, you might not be able to buy your own home back from yourself without an increased monthly payment.”
Where’s the entry-level housing?
“The thing that’s missing is entry-level housing available for sale, but also, all of the apartment-building that is going on is all class A properties, which is the most expensive — no one is building class C properties,” said Duncan.
Sellers unwilling to budge
“Household psychology has affected people; they’re willing to take less risk than they were in the past,” said Duncan. “You can see that in the remodeling data. People are staying in place and remodeling their existing homes with a higher probability than in the past.”
“The median tenure in homes is at an all-time high,” noted Jonathan Smoke. “Part of [that] is … the reasons people are purchasing tie into life events.
“Where this can be particularly important is with retiring baby boomers,” he added. “There’s a cohort of baby boomers who might think it’s in their best interest to stay put and make improvements so they can age in place.”
A basic economics lesson: When inventory (supply) is thin on the ground, and demand is unchanged, you can expect prices to go up.
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