MarketWatch by Andrea Riquier
Full article can be found at MarketWatch.com
‘Tis the season for authoritative forecasts about what to expect in the coming year, but given the enormous surprises that have rocked Washington, markets, and beyond in the past 12 months, MarketWatch decided to offer not predictions, but questions, about the housing market in 2017.
What impact will higher mortgage rates have on the market?
The average 30-year fixed-rate mortgage has jumped 76 basis points in the weeks since the presidential election, and most housing analysts think it’ll go even higher in 2017. Mortgage rates would have to be a lot higher before they really crimp a buyers’ ability to afford a home – Trulia chief economist Ralph McLaughlin estimates between 7% and 10% for many metros – but in an era of ultra-low inventory and fast-moving markets, anything that adds to cost isn’t helpful for buyers.
“What we haven’t seen yet is good wage inflation tied to job growth,” Bryan Sullivan, CFO at online lender loanDepot, told MarketWatch.
But higher mortgage rates have secondary effects, as well. Consider homeowners who bought their homes in the past few years, or who’ve enjoyed a refinance or two as rates hovered closer to 3%. Unless a move is absolutely necessary, those owners are likely to balk at having to sell their home and then borrow at higher rates for a new one.
“Interest rate lock matters,” says Mark Zandi, chief economist for Moody’s Analytics.
Zandi cautioned that he doesn’t think “rate lock” kicks in until rates are well over 5%, however. He calculates that a one percentage point increase in rates will increase the tenure of a typical American homeowners by just over six months – also not helpful in a market starved for activity.
Chris Prescott, a Redfin real estate agent in the Twin Cities, deals with lots of buyers who, as he puts it gently, lack perspective. “Most of the people buying right now think 4% to 5% rates are crazy,” he said. (Mortgage rates were over 18% in 1981.)
Another knock-on effect from higher rates: fewer people are refinancing. Refinancings have made up about 47% of all originations in 2016, according to estimates from Fannie Mae, Freddie Mac and the Mortgage Bankers Association compiled by the Urban Institute. Those groups expect refis to slide to about 31% of all originations next year.
That will likely prompt lenders to ease restrictions for purchase lending in order to keep activity humming, analysts believe.
Will the inventory shortage, especially at the entry level, ease up?
Trulia data “certainly isn’t showing that may happen any time soon,” McLaughlin said. Inventory of starter and tradeup homes were down 12-13% compared to a year ago, one of the biggest drops in years. McLaughlin is hoping that rising home prices will entice more owners to sell.
The increasingly constrained inventory throughout the housing market has many experts who track the market for existing homes paying a lot of attention to the new construction industry.
Rob Dietz, chief economist for the National Association of Home Builders, thinks some relief is coming. He’s forecasting that overall housing starts will rise 10% in 2017, and that construction of single-family homes, including smaller homes and townhouses, will gain momentum. (Nearly all newly constructed apartment buildings are built to rent, not own.)
But Dietz says the pace of construction he’s forecasting will still fall short of what’s needed to accommodate normal population growth plus obsolescence. Builders’ two biggest budget items, labor and lots, have grown more scarce and expensive since the downturn.
Will Washington help or hurt Middle America housing markets?
Home builders turned giddy after the presidential election, believing that a president who addressed them with a promise of cutting red tape will help clear the way for more activity.
But many of the headwinds quashing construction are found at the local level, particularly in land use restrictions, McLaughlin notes.
And one of Trump’s signature campaign promises, building a wall between the U.S. and Mexico to keep out immigrants, could strangle the flow of much-needed labor, while tighter trade policies could drive up the cost of home construction materials.
Dietz, the chief economist for the home builders’ industry association, acknowledges the “wall” rhetoric isn’t helpful, not only in terms of supply, but also demand: fewer immigrants will diminish household formation, he said.
Still, loanDepot’s Sullivan thinks President-elect Trump, simply by striking a pro-business tone, will help the industry. “The new administration has led with a theme of less regulation and more business opportunity, not irrational exuberance. I think there certainly will be a different tone,” he said.
One of the biggest elephants in the housing finance room is the fate of Fannie Mae FNMA, -0.48% and Freddie Mac FMCC, -0.75% , the massive mortgage backers which have lingered under federal conservatorship ever since the 2008 financial crisis. Zandi, who’s among the most high-profile analysts to propose ways to end to the current limbo, said he’s skeptical any major overhaul will be accomplished.
“Legislatively it’s a very heavy lift,” Zandi said. “It will be difficult for them to thread the needle necessary to get reform done.”
It’s more likely that the enterprises may be allowed to hold some capital, as opposed to dwindling their capital buffers down to zero by 2018, as they’re currently required to do, but “even there I’m skeptical,” Zandi said.
When will first-time buyers come back in force?
Every expert interviewed for this story echoed a comment Dietz made: “Really, the primary challenge is accumulating the down payment.”
That challenge makes FHA loans, which require as little as 3.5% down, very popular among the buyers Chris Prescott works with— even those who have no trouble qualifying for a mortgage. Buyers will often bid more money for a home but ask the seller for help with closing costs, Prescott said.
But Prescott sees something else. In his market, where home prices haven’t fully recovered from the crash, there are still psychic scars as well. Too many young people saw parents or neighbors lose homes or home equity.
It will take at least a few more years for “confidence and growth” to get the “bad taste” from the crisis out of peoples’ mouths, Prescott said. “There’s a lot of people scared of the housing market and a lot of people have decided to be long-term renters.”
MarketWatch by Andrea Riquier
Full article can be found at MarketWatch.com
