What will 2017 bring to the US real estate market? Can we expect to see a drastic shift in homebuyer trends? Will housing inventory increase? Will prices remain high and buyer demand remain strong? A recent Inman article reveals what eight real estate experts predict will happen in 2017. Read on for the high-level takeaways.
Mortgage Rates Will Increase:
Ralph McGloughlin, the chief economist at Trulia, said, “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.
Svenja Gudell, the chief economist at Zillow agrees. His prediction is that the Fed will increase interest rates this year, starting now. He anticipates that 30-year-fixed mortgage rates could rise as high as 4.75% by the end of the year. Regardless of where interest rates end up, the experts unanimously agree that the days of historically low interest rates are likely coming to an end. So what does that mean from a buyer demand and affordability perspective?
Affordability Will Remain a Challenge:According to projections by Mark Fleming from First American, if mortgage rates increase to 5% in 2017, we can expect to see home sales slow by approximately 4%. Fleming elaborates by explaining that a major drop-off in sales doesn’t typically occur until rates reach 6-7%. But, because rates have been low for so long, we may see a bigger impact on buyer demand with smaller increases.
So what can buyers do to mitigate affordability issues brought on by increased rates? Realtor.com’s chief economist Johnathan Smoke suggests looking for more affordable properties, preparing to make larger down payments and opting to take out a shorter-term mortgage. He’s a little less convinced that severe rate increases are inevitable and in fact thinks that Trump’s economy stimulus plan may take some pressure off of the Fed.
Looking now to major metros, Trulia’s Ralph McLaughlin points out that affordability has been an issue for some time, and he expects that will continue to be the case. Overall cost increases due to rising interest rates will only add to the struggle for residents in high-priced markets. To contrast, McLaughlin points out that despite increases, residents of lower-demand US markets will continue to have affordable housing options. Buyers in these markets should still be able to purchase a home for about 20% of their income.
There Will be No Relief in Low Housing Inventory:
Low housing inventory has been a nationwide challenge for the past several years, and 2017 is predicted to be no different. There are four major factors that have contributed to low inventory across the US:
- High prices sidelined mid-level homebuyers — with increased costs, they can’t afford to buy a larger home
- Investors are hanging on to high-demand rentals — over 1/3 of all starter homes are owned by investors
- Lingering effects of the market crash are tying up inventory — underwater homeowners refuse to sell
- Entry-level homes are extremely limited — first-time buyers can’t afford mid-level homes and continue to rent
Based on the factors listed above, it’s easy to see how this low-inventory cycle is self-perpetuating. Another challenge is that new construction lags far behind demand, and builders are focusing on mid-level homes rather than entry level properties. All things considered, it’s no surprise that experts agree low inventory will continue to be a challenge throughout 2017.
First-Time Buyer Potential is High, But With Challenges:
Millennials, the most prominent group of potential first-time homebuyers in the US, have been heavily impacted by low housing inventory. In 2016, many were stalled: They wanted to buy but found themselves unwilling or unable to make their way into the market. In fact, home ownership rates for Americans under the age of 35 fell to a record low of just 34%. So will that change in 2017?
Doug Duncan from Fannie Mae says the desire is there. “Our surveys of the prime first-time home buying age people suggests a very high, 90 percent-plus, want to eventually own a home.” But the reality depends a lot on what happens with wages and the economy. Because there’s been such a severe decline in the number of starter homes available, first-time home buyers have found that they need more money to get into the market because they’re been forced into more expensive homes.
Despite the issues listed above, Matthew Gardner from Windermere believes this year will be a big one for first-time buyers. “I believe that the possibility of continued interest rate increases, in concert with a tightening labor market, will get many would-be buyers off the fence and into home ownership.” In other words, first-time buyers experiencing wage growth at a pace not seen since 2009 will be willing to jump into the market sooner rather than later. Doing so will allow them to stretch their dollar further by avoiding anticipated rate increases.
The stage is set for low housing inventory and affordability challenges to continue to have a major market impact in 2017. But if you’ve been eyeing a move from a major metro to a more affordable housing market, conditions are right to sell. Take advantage of looming rate hikes and motivated buyers and make more profit on your home sale!
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