Will 2017 be a good year for home sales? Real estate, banking and mortgage industry experts point to different factors, ranging from a still-improving economy to millennials finally moving out of their parents’ homes, as signs that indicate this will be a good year. Although things could change – and there are many ways to define what makes a year good – people remain at least cautiously optimistic.
The Mortgage Bankers Association (MBA), in its January 2017 MBA Economic and Mortgage Forecast Commentary, estimates that total originations will decrease to $1.56 trillion in 2017 from $1.89 trillion in 2016. The MBA also expects the 30-year mortgage rate will increase and hit 4.7% by the end of this year. Refinance volume will continue to fall, as a large segment of borrowers already took advantage of sub-4.0% rates in recent years.
In fact, the share of refinances fell to below 50% for the first time since 2015, says Michael Fratantoni, chief economist and senior vice president of research and industry technology for the MBA. “The market is shifting,” Fratantoni tells MortgageOrb. “We saw the share fall off in refinance, so purchase is really going to be the driver of the majority of activity in 2017.” The MBA predicts the refinance share will fall to 38% in the first quarter of 2017 and continue to fall into the 20s in the second and third quarters.
Housing starts will increase, after decreasing during the past several years. Fratantoni says several factors will help, such as job growth, an improving economy, increased wages and changing demographics. “Millennials are entering their peak home buying years,” he says. “Historically, on average, 40 percent of existing-home sales are by first-time home buyers, and immediately post-crisis, that dropped to as low as 25 percent. The last few years, we saw first-time buyer share increase to mid-30 percent, which is not the typical 40 percent but certainly better than we were.”
Others agree that millennials will play a positive role in the home buying outlook.
“The millennials right now are the largest group of home buyers,” says Rick Sharga, executive vice president of Ten-X. “They have gone from will they ever buy a house to buying more than anybody else, partly because there are more of them.”
Sharga says millennials who moved back in with their parents and who did not buy cars (because they use Uber and Lyft) were able to save money toward purchasing a home. “They are jumping past the starter home and buying something more expensive,” he says. “That flies in the face of most predictions of millennials never buying a house. This group wants to be homeowners as much as any other group. It’s just taken them longer.”
There are some negatives in the immediate future of home sales. “Credit is still difficult to get, home prices far outpaced wage growth over the years, and the middle-class segment of the population effectively make less money than 10 years ago, while home prices went up,” Sharga says. “That’s been a big disconnect.”
As interest rates rise, there is another risk. “When you have a three-and-a-half percent loan, and the interest rates go up to six, do you want to sell your house, move to a more expensive house and pay twice as much interest?” Sharga says. “That will keep people in their homes.”
Ralph DeFranco, Ph.D., global chief economist for mortgage services at Arch Capital Services Inc., says rising interest rates and a continued shortage of supply are a double-whammy that is contributing to worsening affordability. “Buyers may have a hard time finding the right home, given a dearth of homes for sale,” he says, adding that there are a third fewer homes listed for sale than normal.
Interest rates have been artificially low, DeFranco says, “suppressed by both the Fed to stimulate our economy and by overseas investors buying our bonds because rates are higher here than in Europe and Japan.” He expects only one or two Fed rate increases this year due to low inflation, a wait-and-see attitude by the Fed on future federal tax and spending policies, and “a desire not to antagonize a president who is aiming for a large increase in growth.”
Daren Blomquist, senior vice president of communications at ATTOM Data Solutions, parent company of RealtyTrac, says the rising interest rates will help home sales, which seems counterintuitive. “Rising interest rates will have a chilling effect on home sales, but the short-term effect in the first half will be to see an uptick in sales as buyers look to beat the interest rates,” he says. “Consumers are hyperaware of interest rates these days, and they will certainly react to that.”
Blomquist adds that there are regional differences, and some middle-America markets are less interest rate sensitive than others. Homes in some midsize markets are still relatively low-priced, so even with interest rates rising, they will remain affordable.
Some lenders can take advantage of these regional differences, says Rick Roque, managing director of mortgage banking at Menlo Co. “If you are a small to midsize mortgage banker and rates go up, what do you do? You get a branch in Dallas, or somewhere,” he says. “You can go in any direction into a market you are not in. Companies that do grow despite a down market do so because they do a market push.”
This takes capital. “The healthier companies have cash invested in growth,” he says. Some companies will be unable to resist the downward pressure of the market, and this will lead to consolidation. Meanwhile, mortgage volumes will increase. “We will see with fewer mortgage players, there will be a lot more mortgage companies benefiting from that because of the consolidation.”
Non-bank lenders are helping fill a need of borrowers who typically would not be served by traditional lenders, says Min Alexander, senior vice president of real estate services at Altisource. “We have more non-bank lenders who are able to address financing for first-time homeowners, buyers who do not have 720 FICO scores,” she says. “We are seeing more of that trending.”
Another factor that will help boost home sales is consumers’ positive outlook. “When buyers start sensing the economy is improving, and interest rates are creeping up slowly, there are implications for the housing market,” she says. “This is the largest investment most people make, and the individual thinks, ‘Okay, my prospects are good, I don’t have to hunker down, I can make a down payment and not deplete my cash reserves, and we are not having layoffs in my community.’”
Former homeowners who are renting need certain triggers to help encourage them to make the move. “You can’t predict what individuals will do,” she says. “The factors that buyers specifically factor into these are the primary levers we see – the economy, outlook in rates, strength of the housing market and access to financing.”
Consumers are thinking somewhat positively, according to the Fannie Mae Home Purchase Sentiment Index, which distills information about consumers’ home purchase sentiment from Fannie Mae’s National Housing Survey. The index increased by two percentage points in January to an index score of 82.7, ending a five-month decline. Among the positive attitudes were the following: The net share of Americans who say they are not concerned about losing their jobs rose one percentage point to 69%; also, the net share of Americans who believe that home prices will go up in the next 12 months rose by seven percentage points, and the net share reporting significantly higher household income in the past 12 months rose by five percentage points.
Meanwhile, the net percentage of those who say that it is a good time to sell a house rose by two percentage points, while the net share of those who say it is a good time to buy a house fell by three percentage points. “When we combine all those factors together, that leads us to expect that existing-home sales will go up 1.6 percent,” says Mark Palim, deputy chief economist for Fannie Mae. “You have seen a pickup in consumer confidence post-election, but you have not seen confidence around buying due to these factors such as interest rates.”
There has been some modest wage improvement, Palim says, but there are headwinds. “Interest rates increased substantially over the last three months, and there is pretty strong price appreciation in most markets, and those affect affordability,” he says.
The National Association of Realtors (NAR) also looked at consumer attitudes in its Aspiring Home Buyers Profile, which analyzed 2016 quarterly survey data from its Housing Opportunities and Market Experience survey. Among the findings were the following: In 2016, more than 90% of homeowners and roughly eight out of 10 non-homeowners said owning a home is part of their American Dream. However, the share of non-homeowners saying it was a good time to buy declined from 63% in the first quarter to 55% in the fourth quarter. The share of homeowners who thought it was a good time to buy also declined but hovered at a much higher rate of around 80% each quarter.
“The positive part is people do want to own a home,” says Jessica Lautz, managing director of survey research and communications for NAR. “Even though there are current hurdles, non-owners do aspire to own a home.” One hurdle is student loans are causing many millennials to delay buying a home.
Another finding is that consumers have a misconception about how much money they need for a down payment. According to NAR’s Profile of Home Buyers and Sellers, the median down payment for first-time buyers has been 6% for three straight years and 14% for repeat buyers in three of the past four years. However, when asked about the amount of a down payment needed to purchase a home, 87% of non-owners thought a down payment of 10% or more is necessary.
Communications efforts can help. “There are people out there who may be able to qualify and to become a buyer,” Lautz says. “Getting the message out there that programs are available may be half the battle.”