The housing market is expected to pick up moderately next year on steady job and income growth and an easing supply crunch, but rising mortgage rates are likely to temper the gains, economists say.

The “X” factor is President-elect Donald Trump. Some of his proposed policies could juice home sales and starts more than anticipated while others may constrain the market.

“We think 2017 is going to be another solid year” for housing, says Ralph McLaughlin, chief economist of real estate research firm Trulia. “But homebuyers will continue to face headwinds.”

Among the chief stumbling blocks is the rise in mortgage rates. Since late October, the average 30-year rate has climbed from 3.47% to 4.32%, boosting the monthly payment on a $200,000 mortgage by $97. Yun estimates the rate will increase to about 4.6% by the end of 2017, adding an another $34 to that monthly mortgage check.

Rates are rising in anticipation of higher inflation under Trump’s fiscal stimulus plan and faster interest rate hikes by the Federal Reserve.

McLaughlin notes that with rents soaring in recent years, owning a home is still a far better deal than renting in most of the country. But as mortgage rates edge higher, Yun says some low- and moderate-income buyers will no longer qualify for a loan.

“People at the margins (will be) priced out,” he says. He estimates the increase in rates over the next year will mean 400,000 fewer home sales than if borrowing costs were flat.

Kendall Walker, a real estate agent at Redfin in Northern Virginia, says she hasn’t yet seen customers ditch their house hunts because of higher rates. But she adds, “We’ve had some buyers come down in price” to offset the bigger mortgage burden, reducing the size of their dream homes by as much as 30%.

Fortunately, Yun says, steady job and pay gains will result in an overall pickup in home sales in 2017. Many economists expect current average annual earnings growth of 2.5% to approach 3% by the end of next year as the low, 4.6% unemployment rate forces employers to bid up for workers.

Another positive development is the prospect of somewhat more ample supplies. There was a four-month inventory of homes nationally in November, according to the Realtors group, well below a healthy six-month stockpile. That has crimped sales and pushed up prices, which have risen 5% to 6% the past couple of years.

One reason for the meager inventory: the housing crash left many homeowners owing more on their mortgages than their homes were worth. Some have hesitated to unload their units until they realize bigger equity gains, McLaughlin says. Also, many investors snapped up cheap homes during the crisis and rented them out, leaving fewer on the market.

But as a result of rising prices, the share of homeowners who are “seriously underwater” fell to 10.8% in the third quarter from 29% in 2012, according to ATTOM Data Solutions and RealtyTrac. Higher home values also have prodded more investors to sell their units, a trend McLaughlin expects to continue.

Meanwhile, home builders are expected to respond to the tight supplies by putting up more houses. Housing starts are estimated to increase 10% from 1.18 million this year to about 1.3 million in 2017, according to a survey of 53 economists by Blue Chip economic Indicators. That’s not too far from the 1.5 million deemed normal and well above the roughly 400,000 bottom in 2010. Yun says single-family home construction will drive the gains.

As the fresh supplies hit the market, he predicts the current four-month inventory of existing homes will increase to five months by midyear, helping moderate annual home price gains from 5.5% this year to about 4% in 2017.

That would still outpace wage growth for many Millennial first-time homebuyers, a group that also will be particularly squeezed by higher mortgage rates. Yet Yun says many Millennials are likely itching to move out of their parents’ homes and settle down after postponing marriage and families for several years. He predicts the share of homes bought by first-time buyers will rise from 32% in November to 35% next year – still below a normal 40%.

Trump’s policies are a wild card. His tax cuts could put more money in buyers’ pockets and goose demand, Goldman Sachs says. And his proposal to lift some financial regulations could make it easier for some consumers to obtain mortgages, McLaughlin says.

But his proposed restrictions on immigration may curtail population growth and dampen housing demand while exacerbating a construction worker shortage that’s already constraining housing starts, Goldman and McLaughlin say.

Paul Davidson , USA TODAY

• 
• Realtor.com® Forecasts Post-Election Economy to Result in Higher Mortgage Rates
  While Housing Delivers Slower Gains in 2017
• Phoenix housing market predicted to be No. 1 out of 100 local metro forecasts

The 2017 housing market will be a year of slowing, yet moderate growth, set against the backdrop of a changing composition of home buyers and a post-election interest rate jump that could potentially price some first-timers out of the market, according to the realtor.com® 2017 housing forecast released today.

The report also predicts the top five housing trends of 2017, as well as home prices and sales for the 100 largest metros in the U.S.

2017 National Housing Forecast
The 2017 national real estate market is predicted to slow compared to the last two years, across the majority of economic indicators. Home prices are anticipated to increase 3.9 percent and existing home sales are forecasted to increase 1.9 percent to 5.46 million homes. Interest rates are expected to reach 4.5 percent due to higher expectations for inflationary pressure in the year ahead.

Realtor.com® is forecasting the homeownership rate will stabilize at 63.5 percent after bottoming at 62.9 percent in 2016. New home sales are expected to grow 10 percent, while new home starts are expected to increase 3 percent. The forecast is based on GDP growth of 2.1 percent, a 2.5 percent increase in the consumer price index and unemployment declining to 4.7 percent by the end of the year.

Prior to this month’s election, demographics and an improving economy were laying the foundation for a substantial increase in first-time buyers in 2017, but due to mortgage rate increases over the last few weeks realtor.com® predicts first timers will face new hurdles as they navigate the qualification and buying process. These higher rates are associated with anticipation of stronger economic and wage growth next year, both of which favor buyers. However, higher rates will make qualifying for a mortgage and finding affordable inventory more challenging.

“We don’t expect the outcome of the election to have a direct impact on the health of the housing market or economy as we close out 2016. However, the 40 basis points increase in rates in the days following the election has caused us to increase our interest rate prediction for next year,” said Jonathan Smoke, chief economist for realtor.com®. “With more than 95 percent of first-time home buyers dependent on financing their home purchase, and a majority of first-time buyers reporting one or more financial challenges, the uptick we’ve already seen may price some first-timers out of the market.”

Top Housing Trends for 2017
Next year’s predicted slowing price and sales growth, increasing interest rates and changing buyer demographics are setting the stage for five key housing trends:

1. Millennials and boomers will dominate the market –– Next year, the housing market will be in the middle of two massive demographic waves, millennials and baby boomers – that will power demand for at least the next 10 years. Although increasing interest rates have prompted realtor.com® to lower its prediction of millennial market share to 33 percent of the buyer pool; millennials and baby boomers will still comprise the majority of the market. Baby boomers are expected to make up 30 percent of buyers in 2017 and given they’re less dependent on financing, they are anticipated to be more successful when it comes to closing.

2. Midwestern cities will continue to be hotbeds for millennials – Midwestern cities are anticipated to continue to beat the national average in millennial purchase market share in 2017 with Madison, Wis.; Columbus, Ohio; Omaha, Neb.; Des Moines, Iowa; and Minneapolis, leading the pack. This year, average millennial market share in these markets is 42 percent, far higher than the U.S. average of 38 percent. With strong affordability in 15 of the 19 largest Midwestern markets, realtor.com® expects this trend to continue in 2017 even as interest rates increase.

3. Slowing price appreciation – Nationally, home prices are forecast to slow to 3.9 percent growth year over year, from an estimated 4.9 percent in 2016. Of the top 100 largest metros in the country, 26 markets are expected to see price acceleration of 1 percent point or more with Greensboro-High Point, N.C.; Akron, Ohio; and Baltimore-Columbia-Towson, Md., experiencing the largest gains. Likewise, 46 markets are expected to see a slowdown in price growth of 1 percent or more with Lakeland-Winter Haven, Fla., Durham-Chapel Hill, N.C.; and Jackson, Miss., undergoing the biggest shift to slower price appreciation.

4. Fewer homes on the market and fast moving markets – Inventory is currently down an average of 11 percent in the top 100 metros in the U.S. The conditions that are limiting home supply are not expected to change in 2017. Median age of inventory is currently 68 days in the top 100 metros, which is 14 percent – or 11 days – faster than U.S. overall.

5. Western cities will continue to lead the nation in prices and sales – Western metros in the U.S. are forecast to see a price increase of 5.8 percent and sales increase of 4.7 percent, much higher than the U.S. overall. These markets also dominate the ranking of the realtor.com® 2017 top housing markets, making up five of the top 10 markets on the list (Los Angeles, Sacramento and Riverside, Calif., Tucson, Ariz., and Portland, Ore.) and 11 of the top 25 (Colorado Springs, Colo.; San Diego; Salt Lake City; Provo-Orem, Utah; Seattle. and Oxnard-Thousand Oaks-Ventura, Calif.)

Top 2017 Housing Markets
Despite a more moderate housing market overall in 2017, strong local economies and population growth will continue to fuel the nation’s hottest markets. The realtor.com® 2017 top 10 housing markets based on price and sales gains are: 1. Phoenix-Mesa-Scottsdale, Ariz.; 2. Los Angeles-Long Beach-Anaheim, Calif.; 3. Boston-Cambridge-Newton, Mass.-N.H.; 4. Sacramento–Roseville–Arden-Arcade, Calif.; 5. Riverside-San Bernardino-Ontario, Calif.; 6. Jacksonville, Fla.; 7. Orlando-Kissimmee-Sanford, Fla.; 8. Raleigh, N.C.; 9. Tucson, Ariz.; and 10. Portland-Vancouver-Hillsboro, Ore.-Wash.

These top 10 markets are forecast to see average price gains of 5.8 percent and sales growth of 6.3 percent, exceeding next year’s anticipated national growth of 3.9 percent and 1.9 percent, respectively. But when compared to last year, prices in eight of the top 10 markets are expected to decelerate with only Los Angeles and Tucson, Ariz. showing stronger growth than last year. Other commonalities among the top 10 housing markets include: relatively affordable rental prices, low unemployment, large populations of millennials and baby boomers, as well as a high number of listing views on realtor.com®.

See Table 1 for the ranking of the top 100 largest metros in the U.S., as well as their price and sales forecasts.

Daily Real Estate News | Friday, December 21, 2012

Home owners are desiring bigger spaces again, following five years of downsizing trends. Read More

Forbes partnered with Nextdoor.com, a social network for neighborhoods, to determine the friendliest towns in America. A total of 500 towns with populations between 5,500 and 150,000 were included in the study and ranked on the percentage of owner-occupied homes, crime rate, charitable giving, and percentage of college graduates. Studies have shown home ownership can increase neighborhood stability and college-educated people have been found to display more civic engagement.

The following towns emerged as the top 6 friendliest towns in the nation, according to the study:

1. Sammamish, Wash.: a Seattle suburb where nearly 90 percent of households own their own homes.
2. Orinda, Calif.: Just outside of Oakland, this suburb boasts a 92 percent of owner-occupied units.
3. Fishers, Ind.: This town has a very low crime rate and year-round community activities.
4. Seal Beach, Calif.: An “Orange County seaside enclave” in which about 75 percent of residents own their homes.
5. Westerville, Ohio: A Columbus suburb boasts about 40 parks, and a very low crime rate.
6. Frisco, Texas: Fast-growing suburb in which the population has grown from 40,000 to 120,000 since 2000 and 80 percent of its risdents own their homes.

Find out what other towns made the friendliest list at Forbes. 

Economic activity turned sluggish in the fourth quarter as uncertainties loom over the fiscal cliff, restraining consumer and business confidence, according to Fannie Mae’s Economic & Strategic Research Group. Still, the housing market is staying resilient, researchers note.

“With data pointing to soft economic conditions and the fiscal policy debate hanging in the balance, we expect growth in the current quarter to moderate from the pace seen last quarter,” says Doug Duncan, Fannie Mae’s chief economist. “On the bright side, the housing market has stayed resilient and continues to show signs of a strong, sustained recovery. Mortgage rates remain close to historic lows and home sales and home prices are trending positively. For the first time since 2005, residential investment is poised to contribute to annual economic growth this year, albeit on a small scale.”

Housing and mortgage activity is expected to gain momentum in the new year, Duncan says. Fannie Mae forecasts that home sales will increase by 8 percent in 2013, after a projected 10 percent increase this year.

“Although home prices have dipped during the seasonally weak fall and winter seasons, year-over-year gains have strengthened significantly above 2011 levels, and we expect that trend to continue in coming years,” Duncan says.

Source: “Fannie Mae: Fiscal Cliff Remains Key Risk Factor to Near-Term Growth,” RISMedia (Dec. 20, 2012)