It didn’t always feel like it, but 2016 was a pretty good year for the housing market. From Brexit to Trump, there were several surprises, but ultimately, we’re heading into 2017 with a solid footing underneath us.
No one knows exactly what will happen in the new year, and with a new administration taking office in January, it’s not easy to make detailed predictions. However, there are several data points that we can use to point us in the right direction.
So what’s in store for the housing in market in 2017? Here are 5 things to watch out for.
1. Mortgage rates will move higher
The 2016 housing market was fueled by extremely low mortgage rates. We saw rates bottom out last year at near record levels (around 3.5%) after the Brexit vote. Post-election, they’ve skyrocketed over seventy basis points (one basis point = 0.1%), mostly due to expectations that the Donald Trump administration will boost the economy with its infrastructure spending plan. While the quickness with which rates rise might soften somewhat, it’s widely expected for mortgage rates to continue on their ascent next year.
The Federal Reserve’s Federal Open Market Committee (FOMC) just recently raised the benchmark interest rate by a quarter-point for the second time in a decade.
The FOMC will meet at least eight times in 2017, and fed officials have stated that they believe it will be appropriate to raise the federal funds rate around three times throughout the year. It’s true that the FOMC does not directly control the direction of mortgage rates, but it can play a large role in influencing which way rates are headed.
So how high will mortgage rates rise?
It’s not unfathomable to suggest that mortgage rates could be somewhere between 4.75%-5.0% in the fourth quarter of 2017. Long-term interest rate speculation should always be taken with a grain of salt though. Many, many things could happen between now and then.
Click here to get today’s latest mortgage rates.
2. Millennials will buy more homes
In 2016, Millenials (ages currently 18-34) surpassed Baby Boomers as the largest living generation in the United States. While rising mortgage rates might price some of them out of the market, they are still poised to be one of biggest demographics of home buyers (some estimates are saying they will account for up to 33% of home buyers).
Marriage and children are no doubt on the way for many of them, and those are two key life events that often precede the motivation to purchase a home.
One other interesting trend for millennials in 2017 is the decision to settle in the Midwest. Apparently, the affordability and the proximity to big universities is enough of a draw in to keep millennials from heading to the coast.
3. Home price growth will soften
In 2016, home prices rose around an estimated 5%, putting them back to where they were before the housing bubble burst in 2008. While that may be great news for home owners, it’s not something every prospective home buyer is crazy about.
Nevertheless, home prices are expected to continue to rise over the course of the new year, albeit by a slightly lower margin. Zillow’s Chief Economist Svenja Goodell is predicting home prices will increase by 3.6% next year. That’s right about where other economists are predicting, give or take a few basis points.
Of course, in a nation as large and varied as the United States, not every housing market is created equal. Some markets will continue to march forward with strong growth while others will slow down and falter. For instance, cities in the western United States are predicted to outperform their eastern counterparts (just as they did in 2016) next year. As you can see below, five of the top ten cities in the graphic below are located out west.
Taken as a whole, though, home price growth will moderate somewhat compared to 2016.
4. New home construction gets more expensive
The construction industry struggled to find workers in 2016, and that trend is expected to continue. According to the National Association of Homebuilders, there are an estimated 200,000 vacant positions in the construction industry right now.
It’s not just confined to one position either. Employers are finding it extremely difficult to find both entry level and experienced workers alike. With less laborers competing for jobs, companies are forced to raise wages in order to attract talent.
Those extra costs will inevitably get passed on to customers, resulting in an increased cost for new construction. Not only that, this shortage of labor means that fewer houses are being produced.
Fed overplaying their hand
Not everyone is so optimistic about the housing market and the economy in general. A recent report from the Financial Times shows that many economists are extremely doubtful that the Federal Reserve will wind up proceeding with multiple rate hikes in 2017. Instead, they believe that the Fed will raise rates once at their June meeting.
It’s definitely reasonable to be fairly skeptical of fed rate hike predictions, seeing how some fed officials were touting up to four rate hikes this year and in the end they barely pulled one off.
Doubts about Trump stimulus
While the stock markets surged after Donald Trump came out and stated that he has plans for substantial fiscal stimulus, some experts believe the path ahead won’t be so smooth. Euro Pacific Capital CEO Peter Schiff has come out recently as one of the few economists to question the efficacy of Trump’s plan. Here it is in his own words:
“The Federal Reserve is going to have to step up to the plate big league if Donald Trump is going to want to move forward with the tax cuts and spending increases that he has promised the electorate. That’s where the markets have it wrong. They somehow think that fiscal stimulus is a substitute for monetary stimulus. It’s not. If we’re going to have larger deficits, it’s impossible to finance them unless the Federal Reserve does it. That means they’re going to have to be launching another round of quantitative easing that is much larger than the ones we’ve had in the past. Rather than being dollar positive, this is a negative for the dollar … If currency traders actually understood what was happening, higher inflation is very bad for the dollar because the Fed cannot fight it.”
Trying to predict the future is often more a mental exercise than it is an actionable guideline. There are just too many unknowns to hang your hat on anything more than several months out. It’s still important to go through the data and try to gain a better understanding of things to come. While there’s no guarantee that any of these predictions will come true, borrowers, investors, and onlookers that are aware of the expectations are better suited to adapt to whatever unfolds in the 2017 housing market.
Data for the graphic via Realtor.com