What will happen to mortgage rates, affordability, inventory and more
- 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 challenges.
- It’s been one unprecedented 2016, between the Brexit vote, the continued persistence of low mortgage interest rates and an election that seemed to temporarily throw markets for a loop. 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?
Whether or not the rate increase will affect homebuyers (and especially first-time homebuyers) remains to be seen, but Duncan believes it’s at least partially contingent on income growth. “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. “Home construction is at full tilt and it’s still not filling the bill, particularly affordable housing,” noted Cook. “The average price of a new home is increasing still; we’re not serving the mid to lower-tier market with new home construction. So you’re not going to see much relief in affordability.” Mortgage rates and ability to buy. “If you’re located in San Francisco, Los Angeles, Seattle, New York or Miami, rising mortgage rates might very well have an impact on you because you’re already stretching your budget as it is to get into a home that you can barely afford at historically low mortgage rates,” Gudell added. “In these places where affordability is already an issue, seeing these small bumps will already have a slight dampening effect, and we’ll see that effect not on all buyers but specifically first-time homebuyers or lower income folks. “People who are repeat buyers or buying higher-end homes won’t feel it so much.”
The big picture
“We still think affordability is going to be a challenge in some of the largest markets in the U.S. — L.A., the San Francisco Bay Area, the Pacific Northwest — but that said, the U.S. is still a very affordable place to buy a home,” said McLaughlin. “Outside the big metros, things look pretty rosy for homebuyers. In many places, buyers wouldn’t have to spend more than 20 percent of their income to buy a home. “In some of the unaffordable markets, we may see pressures alleviate somewhat, but at the same time, nationally we are starting to see wages pick up, and we think that benefits those on the lower income distribution more than middle or upper income.” Still, “we are going to have to see many months or even years of solid wage gains to make up for price gains,” he added. “In general, home values will slow their climb next year,” said Gudell. “Currently we’re looking at 6-percent-ish annual appreciation; next year it’ll probably be half that, so a little bit of relaxation there, which will also feed into being more of a buyer’s market by the time we reached 2018.”
Millennial and first-time buyer trends
The biggest pool of potential homebuyers didn’t make huge strides toward homeownership in 2016 — so what will millennials be doing in 2017? “Our surveys of the prime first-time homebuying age people suggests a very high, 90 percent-plus, want to eventually own a home,” said Duncan. “What has tended to be the case is that they’re saying ‘just not right now,’ and that’s driven by the fact that their incomes haven’t risen as far as they need to and they’ve delayed getting married and having a baby relative to prior groups at this age point.” Duncan added that he thinks we might be at the bottom of the decline in the homeownership rate. “Builders are seeing millennials, whose first home they are purchasing used to be the first move-up home, sort of leapfrogging that entry-level, and part of that may be there simply isn’t sufficient supply of the starter homes; they’ve just delayed buying until they could get the house that they wanted, the more midsized or first move-up house.”
And Gardner thinks there is big potential for first-time buyers in 2017. “Although we have seen modest improvement in this buyer sector, 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 homeownership.”
What else should agents and brokers be on the lookout for in 2017? “You’re not going to see any new government incentives to first-time buyers,” said Cook. “You’re not going to see an additional reduction in the mortgage insurance premium for FHA loans. That’s not the kind of thing the new administration wants to do. “On the other hand, a reduction in regulation is going to make it easier for lenders to be more creative; you’ll probably see more innovation in mortgage lending. I think nonbanks will thrive in this environment,” he added. Interest from first-time buyers and changes in mortgage rates mean that agents and brokers might have to deal with some new challenges, too. “The potential is there for the market to have the most first-time buyers, certainly on an absolute volume basis but also on a shared transactions perspective,” said Smoke. “For the industry, this is the biggest shift we need to be able to contend with because it likely means elongated length of time that people are spending in that journey, especially the first-time buyer, but it potentially also means higher cancellation rates and lower conversion rates. “You’re going to have more challenges with people contending with needing to qualify for and buy a home in the environment we’re in now instead of in the environment we were in the last two years,” he concluded. “I see prices at the median perhaps not growing as fast but prices at the top end are likely to boom,” said Ramcharan. “If a Trump Presidency entails greater inflation or risk, high-end homes are a great hedge against inflation and risk, so for people at the top end, I see that there’s a natural tendency now to shift the wealth away from equity markets into high-end homes.” Who’s able to buy a home is also going to change (slightly), as is where they are looking. “The homeownership rate will grow, and they’ll be less white and a little younger,” said Gudell. “Unfortunately, I think all of us will be spending more time in the car as more people have to look for more housing outside the city center as homes become much more expensive in the urban area,” she added. And how big is the threat of reliving another 2008-like slump?
“It’s been close to seven years since we had a recession,” noted McLaughlin, “and they tend to move in 7-to-10 year cycles; if it’s not next year then the chances go up. There aren’t any signs yet that that is imminent; there are a lot of signs that suggest otherwise, but there are a lot of wild cards at this point that both buyers, sellers and agents need to be aware of.”
From Innman News Service, Amber Taufen, Editor