First American Economist Predicts Rates Will Cool Market in 2017

December 20, 2016

The post-election ‘Trump Bump’ in long-term U.S. treasury yields that triggered mortgage rates to rise above 4 percent, as well as the increase in the Federal Funds rate last week, will likely have a modest cooling impact on potential home sales heading into 2017, according to First American Financial Chief Economist Mark Fleming.

“While rising rates reduce affordability for potential first-time homebuyers, the expected moderation of price appreciation will align house price growth more closely with recently increasing income growth to help offset reduced affordability in the year ahead,” Fleming said.

Highlighting the sensitivity of the housing market to rate decisions, Fleming pointed to the “taper tantrum” that occurred after Fed Chairman Ben Bernanke announced a plan in May 2013 to reduce asset purchases. The average 30-year fixed-rate mortgage increased from 3.54 percent to 4.49 percent. This resulted in existing-home sales to fall 10.4 percent between July 2013 and February 2014. The annualized pace of house price growth slowed from 10 percent to less than 5 percent by the end of 2014.

“Home price appreciation is typically more sensitive to mortgage rate increases and I expect to see a decline in the house price growth rate of almost a full percentage point by the end of 2017,” Fleming said.

According to the National Association of Realtors, existing-home sales grew 2 percent between September and October to 5.6 million. Market gains remain broad-based, as the growth in sales was again seen across all four Census Regions. However, the market will continue to underperform due to the lack of inventory. According to First American, the market for existing-home sales is underperforming its potential by 8.4 percent or an estimated 515,000 of sales.

“While rising rates reduce affordability for potential first-time homebuyers, the expected moderation of price appreciation will align house price growth more closely with recently increasing income growth to help offset reduced affordability in the year ahead,” Fleming added. “The post-election increase in mortgage rates, while not yet impacting sales activity, is expected to slow the pace of existing-home sales and house price appreciation in 2017.”

Want to learn about the 2017 housing market and homebuyer trends? Register for ALTA’s next free webinar, “Has the Game Changed? 2017 Housing Market Forecast and Homebuyer Trends,” which will be held from 1:00-2:00 p.m. EST, Jan. 11.


Contact ALTA at 202-296-3671 or communications@alta.org.

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