The housing market is an endless source of intrigue for economists. The reason for this is that it is one of the best indicators of the state of the overall economy – or at least it used to be. These days, the housing market has some serious issues as an indicator of overall economic health. For starters, the housing market itself is being propped up right now by low-interest rates. Low rates mean that it’s ultra-cheap for buyers to borrow and get their first foot on the property ladder. People with modest incomes can afford massive loans, simply because the interest rates are so low.
Then there’s the fact that the government actively restricts the building of new houses to push the price of housing up. The reason they do this is because of something called the “wealth effect.” If people’s homes are going up in value, then they are more likely to feel better off. And if they feel better off, then the hope is that they will consume more, stimulating the economy. At root, it’s all short-term policies designed to make the government more popular while it is in power, and it has nothing to do with the long-term health of the housing market.
By most standard metrics, the housing market is doing rather well. Globally, house prices are rising, and in the US, they’re rising at close to their fastest rate ever in growing cities like San Antonio and Portland. But is the situation headed into 2017 as rosy as some commentators think? Here are the predictions for what will happen to the housing market over the next twelve months from experts in the industry.
Prediction #1: House Prices Will Rise More Slowly
During 2016, prices in the US rose every month, with the biggest gains coming in the latter half of the year. Overall, prices were up in the US more than 5.61 percent. It was a similar story in places like Southeast Asia and Europe, notes chief economist Nela Richardson.
David Blitzer, the chairman of the Dow Jones index, says that a lot of the growth in house prices globally has been spurred by the fact that consumer confidence is rising. Since the election of Donald Trump, despite what the media would have people believe, consumer confidence is growing fast, and this could be one of the reasons why house prices continue to grow next year. Had Hillary Clinton been elected, it might be an entirely different story. Blitzer cautions though against believing that this increased optimism will lead to accelerating house prices. He points out that house prices can only grow as fast as incomes can sustain the, and there’s every indication that incomes aren’t rising fast enough to keep pace.
The median home price is expected to rise by 5.3 percent in 2017, a touch under the increase seen in 2016.
Prediction #2: Affordability Will Worsen
What is it that determines the price of properties for sale? It’s related to a bunch of supply and demand factors which evolve over time. One of the reasons why house price affordability is declining over time is the increasingly skewed distribution of wealth among wage-earning Americans. Over the last forty years or so, we’ve seen a rise in both high-skilled and low-skilled jobs. People at the high end of the market have seen their incomes accelerate at record pace and they are capturing all of the benefits of our economy’s increased productivity. Jobs have been created at the low end of the scale too – such as cleaners and fast-food restaurant staff. But these jobs are jobs that can be done by almost everybody, meaning that wages here haven’t risen as fast.
Because of this increasing inequality, housing is becoming less affordable to the average person. The wealthy are able to buy up houses as investments and push up the prices of accommodation in cities where they live, but this has the effect of forcing the people on low incomes to other towns and cities because the places they live are unaffordable.
Some experts predict that this year we could see people being shut out of local labor markets where wages are growing, simply because the price of housing is too high.
Many see the only solution as higher building from builders, but this will only result in lower prices is new supply can be brought online quickly. Many builders hope that the government will reduce red tape and make it easier for builders to construct new properties.
Prediction #3: Mortgages Will Be Less Volatile
2016 was the year of cataclysmic political events (which didn’t actually turn out to be all that cataclysmic in the end.) The Brexit vote in the UK last June and the election of Donald Trump in November briefly put the markets into panic mode and sent interest rates on mortgages shooting above the 4 percent mark – just about the highest they have been since 2006.
Unless something goes horribly wrong in on the global political stage this year – perhaps a military confrontation with China – then it is unlikely that mortgages will be as volatile as they have been over recent months.
Experts are predicting that mortgages rates for 30-year fixed programs will range between 3.75 percent and 4.6 percent.
There is, however, optimism in the market, according to Forbes. Donald Trump has promised to increase federal infrastructure spending and drive economic growth to 4 percent, meaning that house prices are likely to rise and property values served by new infrastructure increase.
The only headwind is possible action by the Federal Reserve. Already, the central bank has already bumped baseline interest rates up from 0.5 percent to 0.75 percent. And if they think that Donald Trump is growing the economy too fast (or gaining too much popularity among ordinary working Americans) they’ll slam on the brakes, increasing mortgage rates and crashing the housing market in the process.
Prediction #4: Credit Availability May Improve
Despite the fact that interest rates are low on mortgages, credit is scarce. It makes no sense until you realize the restrictions that lenders have been under since the financial crisis of 2008. Thanks to regulations in the Dodd-Frank Act, lenders have to jump through a bunch of hoops before they are allowed to lend to citizens, reducing the chances of getting a loan.
But this year, things are all change. Donald Trump has promised to repeal the Dodd-Frank Act, already having signed several executive orders to that effect. The idea is that this will allow banks to lend the money they currently have on deposit with the Federal Reserve. Some experts warn however that if Trump gets rid of government-run institutions like Fannie Mae and Freddie Mac – the institutions that were responsible for the housing crisis in the first place – then fewer people will have access to loans. This might be the case, but it’s also good news for the housing market in general since there will be less systemic risk in the system. In other words, people who get mortgages will actually be able to pay for them, should interest rates rise.
Prediction #5: Supply Will Stay Short
According to economist Ralph McLaughlin, new home builds are currently running at less than 55 percent of their historic 50-year average, despite the fact that home prices are reaching historical peaks and the fact that the population is growing rapidly. From a historical perspective, it seems as if there is room for builders to expand their rate of house production, but it is unlikely that new building projects will satisfy demand and lower prices.