2016 was a year punctuated by surprising twists, from Britain’s vote to leave the EU to Trump’s ascendance to the presidency. The year also saw the economy continuing to bounce back from the recession, with low interest rates and healthy wage growth contributing to the housing market’s strong performance.
Which forces will shape the 2017 housing market? Here are the top 6 predictions that experts foresee for the coming year.
2017 Housing Market Predictions
1. Mortgage rates will rise throughout the year, but the 30-year fixed rate will stay below 5%.
What impact will rising rates have on the 2017 housing market? We may see current homeowners opting to remodel rather than purchasing new homes to stay locked into lower rates. Rate hikes could have a dampening effect on home purchases for those dependent on financing, which hits low-income and first-time buyers the hardest. Buyers in hot markets like the Pacific Northwest and California will also feel the rise in rates, as steep home prices have already stretched their budgets to the limit.
However, the good news is that strong job security and wage growth could offset rate hikes. In addition, as banks’ refinancing business decreases, they may become more willing to work with borrowers. Plus, keep an eye on these mortgage-related events in 2017: Fannie & Freddie will back bigger mortgages for the first time since 2006; big-name banks have begun to offer low down payment mortgages; and the White House may (or may not) lower FHA fees for first-time buyers.
2. Millennials will make up 1 in 3 homebuyers in 2017, while Baby Boomers downsize to lower-priced homes. Gen Xers may cautiously reenter the housing market.
Millennials and Baby Boomers are the biggest generations in the country’s history; and as Millennials get married and have kids, Boomers are retiring and becoming empty nesters. Meanwhile, for many Gen Xers whose credit was destroyed during the recession, the 7-year black mark period is finally coming to an end. This means that millions of American families may be looking for houses at the same time, and the shortage of entry-level properties on the market could make homeownership unattainable for some.
Some Millennials are saying “someday, but not right now” to buying their first homes. 44% have at least $25,000 of student loan debt; and coupled with skyrocketing rent costs, it’s difficult to save up for a down payment. However, a number of Millennials have saved enough to skip the starter home and move right into mid-sized houses, particularly in more affordable Midwestern markets. After a rough introduction to adulthood during the recession, 2017 will see many Millennials becoming homeowners—making up a predicted 33% of buyers in the coming year.
Meanwhile, many Baby Boomers remain dubious of housing investments following the recession. In addition, more than 1 in 3 Boomers are helping their adult children to buy their own homes; and the average Boomer carries nearly $30,000 in debt. In 2017, Boomers will be looking to retire and downsize, and we can expect this group to drive the purchase of low-priced homes in 2017.
3. Trump’s impact on the housing market is as hard to predict as his rise to the presidency has been.
Trump is the first real estate mogul that the White House has seen. However, since the housing market wasn’t a hot topic during this election, we don’t know much about the housing policies he’s considering.
It’s likely that politics will impact the 2017 housing market more than they have in the past. Since the election, mortgage rates have already risen due to favorable Wall Street attitudes toward Trump’s proposed tax cuts and infrastructure spending. However, his immigration policies will likely worsen the construction industry’s labor shortage. With 1 in 4 construction workers born abroad, wages will be driven higher, raising home prices and further limiting the availability of entry-level homes.
Beyond these big-picture predictions, many questions still remain: Will his administration privatize Fannie & Freddie? Will loosened regulations enable lenders to grant more innovative loans? Will the government continue to incentivize home purchases for first-time buyers? And most of all: How will uncertainty surrounding his ascendance to the presidency impact the economy in the coming months? We’ll be watching right along with you.
4. “Surban” sprawl and downsized living spaces will become increasingly common.
In 2017, you’ll see the continued influx of urban amenities to the suburbs, enabling residents to live, work, and play in vibrant mixed-use developments without paying downtown rent prices. The rising costs of urban living are made worse by lot shortages and cost-prohibitive land prices in desirable neighborhoods. For the first time in 10 years, rates of individuals commuting by car will increase as homebuyers are pushed farther away from the city in search of affordable housing. For those who choose to stay in the city, you’ll see units getting smaller to fit as many residents as possible into downtown areas near public transit.
5. The gap will widen between the demand for affordable housing and the number of homes being built, driving up prices and making 2017 the fastest market on record.
Labor shortages have the construction industry functioning at 60% of its normal pace—a trend that will get worse in 2017 under restrictive immigration policies. Many of the homes built in the new year will be in the most expensive third of the market, deepening the shortage of affordable homes. Incomes are rising across the country; but for the average buyer, this trend needs to continue for months or even years to make up for the pricing surge, especially near booming cities on the East & West Coasts.
On the plus side, rising home prices mean that the average homeowner gained over $11,000 in home equity wealth in 2016, which is expected to continue in the coming months. In addition, the year brings good news for sellers: 2017 will likely break 2016’s record as the fastest real estate market on record, with the average home going under contract in under 52 days.
6. After years of double-digit growth, home & rent prices will moderate in 2017.
In the coming year, our economy will enter phase 2 of its post-recession recovery: After 2 years of rapid sales growth, home prices are almost back to their pre-recession highs. However, 3 headwinds will slow this growth to a more moderate pace in 2017: Rising prices, tight credit, and the housing shortage.
After years of steep growth, rent prices are also expected to calm down as the supply of new apartment buildings catches up to the demand. With incomes increasing and rent potentially becoming more affordable, the 40% of Americans who rent should have an easier year. However, rental rate growth is expected to remain above the 20-year average, keeping property owners’ finances in the black.