Home sales will improve in 2017. Slightly.
Although existing home sales are projected to improve in 2017, the National Association of Realtors (NAR) believes the gains will be small, not just because mortgage rates are rising, but because consumer confidence in housing is down, with affordability at the root of that sentiment.
In NAR’s fourth quarter Housing Opportunities and Market Experience (HOME) survey, respondents were asked about their confidence in the U.S. economy and their housing expectations in 2017.
Although the majority of respondents believe now is a good time to buy a home, renters are feeling less optimistic.
NAR reports that 57 percent of renters say now is a good time to buy, down 3.0 percent from September and a whopping 11 percent from this time last year. Fully 78 percent of current homeowners say now is a good time to buy a home (unchanged from September, down 4.0 percent from December 2015).
Affordability conditions are a downer
Lawrence Yun, NAR Chief Economist, says declining affordability in many parts of the country is behind the weakening morale.
“Rents and home prices outpacing incomes and scant supply in the affordable price range has been a prominent headwind for many prospective buyers this year,” he said.
Yun added, “Making matters worse, the unwelcoming reality of higher mortgage rates since the election is likely further holding back confidence. Younger households, renters and those living in the costlier West region – where prices have soared in recent months – are the least optimistic about buying.”
Looking into the crystal ball
Existing home sales are expected to close 2016 up 3.3 percent, and NAR projects they’ll rise 2.0 percent in 2017. The median home price increased 5.0 percent this year, with another 4.0 percent increase projected in 2017.
Mortgage rates are expected to hit 4.6 by the end of next year, and most economists believe the Federal Reserve will raise rates this week, followed up by several more increases in 2017. NAR expects the rate to hit 1.25 next year.
“Although the economy is expected to continue to expand with around 2 million net new job creations, existing home sales are expected to see little expansion next year because of affordability tensions from rising mortgage rates and prices continuing to outpace income growth,” said Yun.
Despite these headwinds, Yun is hopeful that the continued job growth, any economic stimulus from the new administration and more millennials reaching their prime buying years will keep demand for the most part on solid footing. The key will ultimately come down to what the housing market desperately needs: more inventory. However, more expensive mortgage rates could also slow the pace of homeowners listing their home for sale.
“Some would-be sellers may be reluctant to move up or trade down – especially if they’ve refinanced in recent years,” said Yun. “That’s why it’s extremely necessary for homebuilders to step-up their production of homes catered to buyers in the affordable price range. Otherwise the nation’s low homeownership rate will struggle to shift higher in 2017.”
Click here to read the full HOME report.