Another year almost over, and what a year it has been! Next month we’ll review the predictions we made for 2016 and see how those predictions stacked up against reality, but for this month, we’ll discuss expectations for the coming year and the impact this may have on buyers and sellers in our area. First, let’s set the stage by reviewing the market data for November.
In the South Bay, sales volume increased 47% on a year-over-year basis in November, while the median sales price increased by 11.8%. Sales volume decreased by 11.4% on a month-over-month basis as compared to October, which is not so uncommon for this time of year. The inventory level dipped to a year-low of 2 months, again not so uncommon for this time of year.
So what does 2017 hold in store for the housing market? Although differing in terms of the numbers, there definitely seems to be consensus among economists as to the general trends we can expect. We’ll examine some of the major ones and then discuss what these will mean on a practical level.
#1 – Increase in Mortgage Rates
Leslie Appleton-Young, VP and Chief Economist of the California Association of Realtors, said in her 2017 Housing Market Forecast that “The average for 30-year, fixed mortgage interest rates will rise only slightly to 4.0 percent in 2017, up from 3.6 percent in 2016.” Jonathan Smoke, chief economist at realtor.com, expects rates to go as high as 4.5%, while Svenja Gudell, the chief economist at Zillow, stated, “I wouldn’t be surprised if the rate hits 4.75%.” The Federal Reserve just raised the overnight interest rate by 0.25 percentage points (only the second time since the Recession) and estimates 2 to 3 more rate hikes in 2017. While the Fed raises or lowers the overnight cost of money, mortgage rates are based on long-term rates, which move in response to the market and take into consideration future economic growth and Fed moves.
For buyers, this could mean a bit of an adjustment to their budgets or expectations. However, a rate less than 5% is still a great rate considering the 45+ year history of mortgage rates and most experts agree that rates will probably continue on their rise from here.
For sellers, there is some possibility that the number of potential buyers may be dampened by the increasing rates. However, there’s also the impact of buyers who might be more anxious to buy a home before rates increase any further.
#2 – Continued but Moderate Increase in Home Prices
The 2017 forecast for the Los Angeles housing market suggests that home values will rise more slowly over the next year. But that’s not necessarily a bad thing. In fact, it would ease concerns of a real estate price bubble and it would give the market a chance to “normalize.”
According to the 2017 California Housing Market Forecast, “California’s housing market will post a nominal increase in 2017, as supply shortages and affordability constraints hamper market activity. The economists at Zillow predict that Los Angeles home values will rise by a mere 1.7% over the next 12 months (through November 2017). That’s a much slower rate of appreciation than what we’ve seen during 2015 and 2016. According to Zillow: “The median home value in Los Angeles is $590,400 … home values have gone up 7.3% over the past year and Zillow predicts they will rise 1.7% within the next year.”
This is good news for sellers who will continue to see the potential for a great sale price in 2017. This is also positive for buyers, especially first-time homebuyers, as the slower rate of appreciation can be encouraging.
#3 – Millennials and Boomers Move the Market
Millennials and Baby Boomers, the two largest American generations in history, are both approaching life stages that are often the impetus for buying or selling a home, whether it be marriage and having children or empty-nesting and retirement. Jonathan Smoke of realtor.com predicts that Millennials could make up as much as 33% of buyers in 2017. (Hint to home sellers: Make sure the agent who helps you sell your home has a marketing plan that includes a robust outreach to this age group). According to Doug Duncan, senior VP and chief economist of Fannie Mae, “Our surveys of the prime first-time home buying age people suggests a very high, 90 percent-plus, want to eventually own a home.” He adds that, “they’ve just delayed buying until they could get the house that they wanted, the more midsized or first move-up house.”
Hence, we can expect the cities or neighborhoods which have more opportunities for first-time buyers or in the “more midsized or first move-up house” to experience increased demand.
All in all, 2017 looks to be similar to 2016 although perhaps a bit more moderated overall. I’ll continue to keep an eye on the market to see where the trends are heading and whatever the changes, I am happy to be a trusted resource for you, whether you are thinking to buy or sell in the near future, or just want to keep track of what the market is doing. Whatever the changes that are in store – nationally, locally, or in your personal situation – all the best to you and your loved ones in the coming year!