Prospects For Real Estate Markets In The New Year
There is a lot of speculation and uncertainty about both the new year and the new administration but what are some realistic expectations for how these changes are likely to affect the real estate market and your home value?
When it comes to the housing market, Trump’s victory raises more questions than it answers. Since Election Day, Trump has said his first priorities would be cutting taxes and increasing spending on infrastructure. The prospects of more disposable income and economic growth are both potentially positive for the housing market.
WHAT WILL RATES DO?
Throughout 2015 and 2016, buyers enjoyed historically low mortgage rates which finally began to increase post-election in mid-November. With such an unusual end to this year, what should we be expecting in 2017? President-elect Donald Trump’s surprise victory was followed by a dramatic rise in our stock market concurrent with a major sell-off in domestic bond markets. This quickly drove U.S. interest rates to the highest levels in over a year. Showing increasing optimism about the U.S. economy, the Federal Reserve responded by raising rates a quarter point in December, and signaling a likely three more hikes in 2017. These are signs that interest rates are likely to rise at a faster pace than previously projected. The Fed pushing short-term rates up doesn’t necessarily automatically translate to higher mortgage rates, but it does put upward pressure on them.
The consensus among industry experts is that mortgage rates are likely to hit 4.5 to 5 percent next year and not likely to decline anytime soon.
According to Mark Fleming, the chief economist at First American, their new estimates show mortgage rates getting much closer to 5 percent at the end of next year. This could put pressure on buyers to act. There are usually options open to buyers for working around higher rates, but buyers in high-priced markets will have bigger problems. This trend could stymie the existing-home sale market as sellers decide to stay put instead of trade up or downsize.
HOW WILL HIGHER RATES EFFECT HOUSING MARKET?
The consistently low rates in recent years have acted as a subsidy for home-buyers. Ralph McLaughlin, Trulia’s chief economist, expects that as rates start moving up, buyers might feel pressure to act but he does not feel we are there yet. “We don’t think rising rates are going to have a very noticeable effect on…home buying activity,” said McLaughlin. He believes that buying a home is still a good deal over a 5-7 year period. McLaughlin does think it’s going to act as an incentive for a lot of buyers to get out there before rates climb higher. But it’s also going to make it more expensive, and people who are continuing to rent and wait to see what happens might not take the step to buying.
Mark Fleming explained that, despite rising rates, they still predict housing price appreciation. “Historically, what you tended to see was an absolute level that the market reacted to…in years past that absolute level was closer to 6.5 and 7 percent,” he said. “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 5s or even as low as 5 percent.”
So if rates jump above 5 percent, it might be time for concern.
First American has reduced their forecast house price growth marginally downward to 3.5% from 4.8%. The good news is that they do not think the level of home purchase activity will be affected. Some buyers might look at homes in lower price ranges, put more money down or change term lengths on their mortgages. “The reason why we don’t see a larger decline in our expectation, is we also have a belief of stronger economic growth moving forward…that comes with growing wage growth” explained Fleming. The expectation is that wage growth will increase in 2017 which will be good for home-buyers and sellers alike. Experts also expect credit availability to be a bit looser as a result of the higher rates, because lenders can make more money and they’ll no longer have the strong refinance market that they’ve had for the last five years. Overall, industry experts are expecting a strong year for housing demand.
“The reason why we don’t see a larger decline in our expectation, is we also have a belief of stronger economic growth moving forward…that comes with growing wage growth expectation…which will be good for home-buyers and sellers alike. Experts also expect credit availability to be a bit looser…Overall, industry experts are expecting a strong year for housing demand.
WHAT WILL BUYERS DO?
In the post-election short term, consumer confidence could track political party lines, which may mean a home sales slowdown in economically healthy blue-states and a sales pick up in red-states where growth has been slow. According to McLaughlin, “Home buyers in economically healthy blue states will likely be rattled and more hesitant about the future of the U.S. economy, which will curb their interest in making large investments. In economically stagnant red states, on the other hand, home buyers will likely feel a surge of confidence that could bolster demand.” The markets overall seem to be confident in the prospect of economic growth so post-election lack of consumer confidence in blue states may not be a big issue.
Another factor is Trump’s tax plan which would give the most substantial cuts to high earners. In theory, extra cash should increase upper income spending on investments like high-end properties.
However, this may not lead to more incremental home buying in high end, hot markets like Marin since home prices are already bolstered by scarcity.
WHAT WILL SELLERS DO?
There is now an entire generation of existing homeowners locked into mortgage rates around 3.5 percent to 4 percent. As a potential seller, they now have a built-in financial disincentive to sell since they are making that decision as a function of what they can afford to buy. Because they lose that low rate and have to get a new mortgage at a higher rate, they probably would not even be able to buy their own home back without an increased monthly payment. Since buying a new home means a new mortgage at a higher mortgage rate, many may decide to stay put and renovate their existing home. In markets that are in high demand, the resulting lack of inventory may drive prices up more than predictions for the broader market.
HOW WILL HOT MARKETS FARE?
Although most buyers probably won’t be overly affected by rising mortgage rates — which are still, relatively speaking, very low — the hotter markets in the country will definitely see a more immediate effect from rate bumps. Experts predict that buyers in more expensive markets like San Francisco, Los Angeles, Seattle and New York might very well be impacted as they are already stretching their budget to get into a home that they can barely afford at historically low mortgage rates. In these areas where affordability is already an issue, seeing these small bumps is already having a slight dampening effect, specifically on first-time home-buyers. According to McLaughlin. “In those markets, interest rates will only have to be 5 percent or 6 percent for the cost of buying to equate the cost of renting, so home-buyers there may be a little bit more hesitant to make a large purchase such as a home if they think they might have to move.
People who are repeat buyers or buying higher-end homes won’t feel it so much
SUMMARY OUTLOOK:
Housing prices are expected to rise but more modestly than in the past. There will be an extremely limited supply of houses on the market due to sellers being locked into incredibly low-rates, irreplaceable mortgages. Buyers’ demand will still be strong, despite forecast increase in rates because of projected strong economic growth and potential tax cuts.
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