2017 Housing Forecast

December 1, 2016

What’s in store for the 2017 housing market? According to some industry experts, new home sales should take off; however, the threat of higher mortgage rates and policy changes could hinder significant growth.

According to Calculated Risk blogger Bill McBride, 2016’s count of new home sales in the U.S. is likely to total around 565 thousand, with housing starts reaching around 1.17 million. If McBride’s predictions are correct, 2016 will go on the books as a much stronger year for new homes than the year before. In 2015, new home sales were 501 thousand and total housing starts were 1.112 million. According to McBride, many of the major housing analyst groups (Zillow, CoreLogic, Mortgage Bankers Association, MetroStudy) were either very close or right on the money when it came to predicting 2015 new home stats.

For 2016, Fannie Mae and Merrill Lynch were very close on new home sales while MetroStudy had the most accurate prediction for starts.

Will the threat of higher rates stall housing growth?

It’s all but certain that 2017 will bring rising rates to the mortgage industry. Recent government announcements and changes in economic growth – particularly in job creation and employment – have caused many to suspect (and rightly so) that the rock-bottom Federal Reserve rate (which has been close to zero since 2008) may be on the way out. The ultra-low Federal Reserve rate helped pull us out of the recession, but from an economical point of view, it’s no longer necessary. And since it was so low, there’s really nowhere for it to go but up.

Not long ago, Janet Yellen, chairwoman for the Federal Reserve, indicated a rate hike was likely on the horizon. Since then, economists have talked a lot about the impact this could have on markets. Well, now we know those higher rates are more than just likely. Fortunately, economists and industry experts believe the market’s strength will help support the increase.

“The bottom line, ostensibly, is that the economy is getting stronger,” said Dean Baker, co-director of the Center for Economic and Policy Research in a recent New York Times article. “Nobody in their right mind would say, ‘I’d rather have higher unemployment and lower interest rates.’ Nobody wants to pay a higher interest rate, but I think that’s an easy choice for most people.”

As for how the housing industry will be affected – prepare to breathe a sigh of relief – a higher Fed rate does not have a major, direct impact on long-term mortgage rates. However, there is an indirect impact. When the Fed’s rate increases, banks may increase the rates on their loan products to help offset their higher costs. This is typical in any business. If the cost of fish goes up, your favorite seafood restaurant’s menu may get a little more expensive. If the cost of oil goes up, gas prices are likely to follow.

The good news is that the U.S. economy has regained considerable strength in the last nine years, making it stable enough to handle a slight rise in rates. And, as long as economic growth can keep up along the way, even further rate increases years down the road won’t necessarily have a negative impact on housing. However, if the rates increase too fast, it could potentially stall mortgage activity, including refinancing.

Photography by [Maslowski Marcin] © shutterstock.com

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