With the New Year and new President, everyone is wondering what will happen to interest rates in 2017. While no one expects a dramatic rise in rates, several key housing economists spoke at the International Builders Conference in Orlando and predicted rates could reach 5%.
Of course, as you would expect, the experts did not agree on the increase, they all felt that rates would rise. Robert Dietz, the Chief Economist at the National Association of Home Builders, predicted the highest increase. During his remarks, he stated that he expects rates to average 4.8% by the end of the year and top 5% in 2018. Core Logic’s Chief Economist, Frank Nothaft was more optimistic. This former chief economist at Freddie Mac sees interest rates hovering closer to 4.6% by the end of 2017.
Ex-Fannie Mae Chief Economist David Berson also weighed in on the discussion. He declined to offer a forecast on rates; he also saw rates rising in 2017. He also stated that he believed that these rising rates “won’t have much of an impact on housing demand” due to strong wage gains and job growth. He expected the expanding economy “will give people the wherewithal to offset” the higher monthly costs rising interest rates create.
In spite of the rising mortgage interest rates, the economists see a strong, growing housing market ahead. Dietz said that he sees a 10% increase in housing starts in 2017 (855,000 units). His prediction for 2018 sees an even stronger growth rate of 12% (961,000 units). While this is still well below what the National Association of Home Builders considers a normal market of 1.34 million units, it’s still a healthy level of growth.
New Presidency Effect on Housing
The incoming Trump Administration has given the economist a sense of optimism as well. Dietz noted that “if regulations get rolled back as Trump has promised builders can reach down” to the lower home price ranges. 25% of the cost of a new house is due to regulations. This would be great news for the real estate market allowing more first-time homebuyers to enter the housing market. Increased demand leads to more housing starts and a healthier market in general.
Lawrence Yun, the National Association of Realtors® Chief Economist has said that this change would open the housing market to more buyers and create the need for builders to build more houses, especially in the lower price ranges. Dietz agreed, “Clearly, that’s a part of the market where we need inventory.”
The Chief Economist of the National Association of Home Builders went on to say that he expected home builders to start building again at the lower price point with the larger builders starting in early 2017. He predicted that smaller builders would concentrate on townhomes and condominium projects. These are a valuable bridge for first time home buyers become homeowners.
The economists made of point of highlighting their top 3 concerns heading into the New Year. Even with a reduction of regulations, labor, land, and lending will remain obstacles for growth. In a recent National Association of Home Builders survey, 64% of the builders reported that land was in short or very short supply. They also indicated that finding workers in the construction industry was increasingly difficult. Qualified tradesmen are needed to fill current openings, and if housing starts do jump, as predicted, this could greatly impact the ability to meet demand in 2017 and beyond.
While recognizing that lenders are slowly loosening guidelines for acquisition, development and construction loans, they would like to see them go even further. The large builders can utilize Wall Street products for financing, but the smaller builders are still struggling to find funding for new building projects.
Even with rising interest rates and other building challenges, the economists were optimistic about the coming years. Studies show that Millennials are becoming interested in home buying and that there is a rising population of 25-55 year olds, the key home buying age. With the prospect of lower building costs, builders can meet this demand with lower priced housing options which will offset the rising interest rates.