It’s been a great year for real estate. Spurred by the Federal Reserve’s mixed reports and low inflation, mortgage rates continually slid through October to historic lows near 3.5 percent. Compared to 2015, the U.S. Census Bureau reports new home sales are up over 12 percent and the National Association of Realtors reports existing home sales are up almost 6 percent.
Since Election Day pegged Donald Trump as the new president elect – a man notorious for making billions in real estate – mortgage rates shot up over a half percent, creating wariness for homebuyers and sellers alike on the short and long-term effects of the new administration on the real estate market.
While the economy is sure to experience some turbulence through the transition into the new administration, the 2017 real estate market should be spurred by loosening of lending practices, increasing equity for homeowners and growth in new home construction.
2016 has been another historic year for mortgage rates as they hovered around 3.5 to 3.875 percent for the first 10 months of the year. While interest rates have fluctuated up and down over the past few years, it’s been five years since we saw interest rates over 5 percent.
You may be under the impression interest rates are a direct result of the rate set by the Fed, but that’s not the case. In fact, the Fed rate and mortgage interest rates have differed between .5 and over 5 percent throughout the past 20 years, according to MortgageReports.com.
The rise in mortgage rates last month was a direct response to Trump’s election. Throughout his campaign, Trump promoted an increase of billions of dollars in infrastructure spending. Investors recognized this will drive up the cost of goods and inflation, thus leading to an increase in the bond market and mortgage rates.
Following the housing bubble and its subsequent burst in the mid-2000s, the recession of 2008 triggered a decrease in all interest rates in an effort to jump-start a very weak economy. We may never see rates this low again, but no one knows. That said, should rates fall to such low levels again it would likely be due to a reaction from a weakened economy – something none of us want for ourselves or our country to endure again.
2017: Trump has promoted an overhaul of U.S. infrastructure and with that, mortgage rates have begun climbing in anticipation of a rise in inflation. While it is unlikely we will see a continued increase of major proportions, buyers should be prepared to see rates in the mid-4 percent range during 2017. Currently, the National Association of Realtors projects interest rates at 4.4 percent in the fourth quarter of 2017.
Another interesting twist could come from what happens with the leadership of the Federal Reserve. Rumors have been swirling about whether Federal Reserve Board Chair Janet Yellen may resign once Trump enters office, or if the president-elect may even try to force her out. Should that happen, it could cause a negative ripple effect throughout the economy as long-term speculation would become foggy.
Home values have continually risen since reaching a low point in December 2011. Real Estate information company Zillow reports home values have increased 6.2 percent over the past year with the national median home value at $191,200. This is still less than the April 2007 high of $196,000, but a slow and consistent increase in home values is in line with historic appreciation trends.
2017: The coming year should finally see a return to a historically normal growth rate in the real estate market. The past 12 years have been a roller coaster of highs and lows, jump-starts and slow-downs – rising rates and low inventory will slow 2016’s momentum, but will not stop it. Both Zillow and the NAR predict home values to increase 3 percent in 2017.
Uncertainty about the next White House administration, mixed with typical seasonal slowdowns for much of the country, could further a lack of inventory on the market as sellers wait for a high-demand scenario.
If Trump can create clarity and some stability in the real estate market and economy as a whole in his first six months in office, buyers and sellers sitting on the fence will have enough confidence to jump into the market and continue to drive values higher.
In 2010, the Obama administration enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. The primary impact it had on the real estate market was through the creation of the Consumer Financial Protection Bureau, which oversees many reforms including protecting buyers from predatory lenders.
While some aspects of Dodd-Frank are vital to the protection of mortgage borrowers, many are overkill. A typical transaction involving a conventional loan once took an average of 30 days, but the norm is now 45 days.
2017: Leading up to Obama’s first term in office, real estate was a hot topic during the campaigns. Real estate reform has taken a back seat leading up to Trump’s election, but he’s made it clear he aims to wipe out a lot of red tape.
While many have suggested Trump will repeal Dodd-Frank, it’s much more likely he’ll aim to cut out the unnecessary fat while allowing the general principles of borrower protection and lender transparency to remain. Despite the arguments over the pros and cons of Dodd-Frank, the true benefit lies in its far-reaching measure for the past six years. This will give lawmakers empirical data to analyze should they decide any paring down is necessary.
Following the real estate bubble burst, housing starts ground to a halt. According to the National Association of Home Builders, housing starts have climbed from a total of 784,000 in 2012 to a projected level of 1.162 million in 2016. But the nation still faces an inventory shortage which must be remedied.
According to the 2016 NAR Profile of Home Buyers and Sellers, first-time homebuyers, who make up 35 percent of the market, pay a national median price of $182,500. This is far below the Census Bureau’s reported median sales price of new homes for October 2016 of $304,500. For homebuilders to be able to sell to a higher-price clientele, those individuals need to sell their existing homes, which over the last few years have finally started gaining positive equity.
2017: The NAHB currently estimates it will have 1.242 million housing starts in 2017, continuing its upward trend over the past five years. While home prices are not expected to make any major jumps, they will continue their upward trend, continuing to cater to repeat buyers.
Our national housing situation is the sum total of hundreds of thousands of individual real estate transactions spanning a vast spectrum of local real estate markets. It’s important to follow national trends and stories as they have a trickle-down effect, but it is imperative you examine your specific situation and surrounding area to find the best opportunity.
Here is what it boils down to: The loosening of lending standards, expanding new home starts, increased equity and home values, and historically low mortgage rates will continue to fuel the real estate market throughout 2017. Optimism in the face of uncertainty may not always run hand-in-hand with reality, but today’s fears will be allayed by tomorrow’s victories.