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Were 2016 Market Predictions Right or Wrong?

By Amanda Curry · Nov 13, 2016 · Mortgage

Were 2016 Market Predictions Right or Wrong?

Image courtesy of Flickr, Dallas

Now that 2016 is coming to a close, and we look forward to 2017, we're taking a look back to see if their market predictions were accurate.

In the beginning of 2016, the Housing News Report asked six prominent economists to forecast what the upcoming year will bring for the US housing market.

Overall, the economists were cautiously optimistic about 2016 when it came to home prices, home sales, interest rates and the impact of loosening lending standards that were introduced by government agencies. Throwing in the Presidential election year, economists were watchful when it came to changes to Fannie Mae and Freddie Mac.

Now that 2016 is coming to a close, and we look forward to 2017, we're taking a look back to see if their predictions were accurate.

Economists Predict: What will be the most important housing market trends in 2016 and why?

Alex Villacorta, chief economist of Clear Capital , predicted that the two most important housing market trends to watch in 2016 will be the continued growth of rental rates and the moderating trend in home prices. He continues, 'Adding insult to injury for the purchase market, increasing rental rates continue to make it more difficult for potential buyers to save up for a down payment.''

Additionally, Villacorta notes that with driving rental prices up and vacancy rates down, this trend unfastens an increasing proportion of potential home buyers, contributing to the lowest homeownership rate in almost 50 years.

Were his predictions accurate?

Yes. In May of 2016, the government's monthly report on the consumer price index indicated that the annual rise in rental income approached 4 percent, nearly four time the overall inflation rate of just 1 percent in the previous 12 months. In fact, rents rose faster than most other categories in consumer prices, including housing and medical.

This chart from the US Census Bureau confirms that the median asking rent for vacant for-rent units spiked in 2016 before levelling off in the third quarter: Median Asking Price

In addition to the rising rental prices, Villacorta noted that we'll see some of the lowest homeownership rates in the US's history, which also proved to be true in 2016.

This graph from TradingEconomics.com depicts homeownership rates since 2012. As you can see, homeownership rates have been on the decline.

Homeownership Rate

As we look closer, homeownership rates remained lower in 2016 than in 2015, making Villacorta's predictions accurate.

New Home Sales

Chief Economist at Realtor.com , Jonathan Smoke , predicted in the beginning of 2016 that demand for for-sale housing will grow and will continue to be dominated by older millennials, aged 25-34. He also notes that Gen-X and baby boomers will play a dominant role in both buying and selling. Gen-X will be seeking better neighborhoods, while older baby boomers will be transitioning into retirement communities or seeking to downsize. Together, Gen-X and baby boomers will open up much of the suburban inventory that millennials seek.

Additionally, Smoke notes that mortgage rates should also being their ascent, as the Federal Reserve attempts to influence rates up without negatively impacting economic growth. Smoke also predicted that we would see large spikes and valleys throughout the year when it came to mortgage rates.

Were his predictions accurate?

Realtor.org reported in October that first time buyers accounted for rebounding home sales in September. First-time buyers reached a 34 percent share, which is a high not seen in over four years, according to the National Association of Realtors.

Although Smoke's predictions were accurate regarding first time homebuyers, mortgage rates did not rise like Smoke predicted. According to Freddie Mac, mortgage rates actually decreased throughout the year, starting at a yearly high of 3.87 for a 30-year fixed rate mortgage in January. In September, the 30-year fixed mortgage rate dropped to 3.46.

2016

Month

Rate

Pts

January

3.87

0.6

February

3.66

0.6

March

3.69

0.5

April

3.61

0.6

May

3.60

0.6

June

3.57

0.5

July

3.44

0.5

August

3.44

0.5

September

3.46

0.5

The graph above depicts that there were no outrageous mortgage rate spikes throughout the year, nor did we see mortgage rates climb steadily. Instead, mortgage rates actually declined progressively throughout the year.

Matthew Gardner, chief economist, Windermere , expected to see more homes for sale in 2016. He explains that homeowner equity started to recover in 2013 and has improved since that time, increasing the likelihood of selling. Additionally, Gardner predicted that there will be more inventory, however, it is likely to still fall short of the supply needed to match demand.

Were his predictions correct?

Inventories of homes for sale in 2016 were chronically low. Total housing inventory at the end of May was 2.15 million existing homes available for sale; however, it was still 5.7 lower than May of 2015 (2.28 million).

In September, we finally saw the market shift, as existing home sales reached 5.47 million (up 3.2 percent from September 2015).

Coupled with 2016's low mortgage rates, demand for homes has been incredibly high, driving down the median days on market for an MLS-listed home. In July of 2016, the median days on market for an MLS listed home was 36 days. This is the fewest number of days for July since the National Association of REALTORS has been tracking such data:

  • July 2012: 69 days
  • July 2013: 42 days
  • July 2014: 48 days
  • July 2015: 42 days
  • July 2016: 36 days

Mark Zandi, chief economist at Moody's Analytics, predicted that the most important housing market trend for 2016 would be the developing housing shortage.

He explains, 'New housing construction has picked up in recent years, but it remains well below that needed to meet demand from newly formed households, second home buyers, and obsolescence of the existing stock of homes.'' Additionally, Zandi believed rental and homeowner vacancy rates would continue to decline, pushing house prices and rents up quickly.

Were his predictions correct?

The number of new home sales in the US definitely picked up, as you can see from the chart below from NAHB.org . This chart depicts the steady growth of new home sales from the end of 2015.

New Home Sales

Svenja Gudell, Chief Economist at Zillow, predicted that 2016 will be all about housing affordability. She explains 'With a lack of affordable homes near city center pushing young and first time buyers out of the suburbs, we'll start to see more people in hot coastal markets forced to move farther from the core of the city to find housing.'' Gudell continues, 'When they get there, they'll be looking for amenity-rich suburbs - mini-cities, with walkable cores and an urban feel.''

Zillow also predicted the follow:

  • The median age of first-time home buyers will set a new record in 2016.
  • More low-income Americans will be priced out of homeownership.
  • Rents will soar in 2016.
  • Home value growth at about 3.5 percent in 2016.

Were Zillow predictions accurate?

Zillow's predictions were quite accurate for 2016.

From previous analyses in this article, we saw that rents in fact did soar through 2016, growing nearly four percent in the last year. As for the growth of home values, it exceeded Zillow's expert expectations, growing 5.5% over the last year. Furthermore, the gap between the bottom and top of the housing market is widening as more low-income Americans are pushed out of homeownership. Finally, the National Realtor's Association found that the median age of a first time homebuyer was 32 , matching the all-time high last set back in 2006, and up from 31 in the past five years. So although it did not break any records, it came close.

Gudell was also spot-on with her predictions regarding millennials seeking out suburban living. The difficult economic landscape has made homeownership difficult. In addition to higher debt loads and lower savings, this generation can simply not afford city living.

The migration to suburbs has been a trend that we have seen for a couple years. The share of millennials buying a home in an urban area declined to 17% in 2015 from 21% a year before. And fewer - 10%, compared with 15% a year earlier - purchased a multifamily home.

What's in store for 2017?

As 2016 comes to a close, we reached out to real estate professionals to gather their thoughts on the upcoming year.

First, we asked them to share their thoughts regarding interest rates increasing or decreasing in the upcoming year.

Marcy Roth, Realtor at Berkshire Hathaway, predicts that interest rates will raise 25 basis points in December through mid-2017.

'If the fee doesn't raise in December, then it will likely in early 2017, as we are in a global economy and all our trading partners in Europe and Asia are easing,'' Roth explains. 'It's difficult for the US to raise rates aggressively as the dollar would become too strong and hard for multinational companies to stay competitive.

Kelly Colbourne, Sales Manager of Monarch Homes of Brevard, seems to think differently. Colbourne predicts that rates will remain steady throughout 2017, neither increasing nor decreasing.

Additionally, Roth and Colbourne have differing opinions on whether or not it will be a buyer's market. While Colbourne suggests it will continue to be a seller's market, Roth believes that the market will transition in 2017 as buyers gain more power in certain price points. Roth expects to see more balance between buyers and sellers throughout 2017.

Roth explains, 'At the very high end we are already seeing buyer fatigue, so in 2017 I believe that will become a more prevalent factor. At the lower end I think it will still be a seller's market in many markets depending on inventory levels.''

Colbourne and Roth do agree on one thing: the future of home prices. Both individuals agree that we should expect to see a rise in home prices throughout 2017, although it shouldn't be a drastic spike. Colbourne explains that we should see home prices rise at a healthy, gradual rate throughout the year.

With home prices expected to rise in 2017, Colbourne expects homebuyers to turn towards new construction. She explains that with the prices of homes going up, many resale homes are priced right around new construction prices, however, the buyers would likely need to come in and completely remodel.

'It makes sense that buyers are turning to new construction with no updating required,'' she adds. 'With low interest rates and healthy down payment, they are able to build a new home and totally customize the home to fit their needs, without breaking the bank.''

Another reason new construction may be a hot trend in 2017? Low inventory. With the inventory being incredibly low in the United States, it often becomes a bidding war on resale homes, which drives the cost up above selling price. Many homebuyers are leaning towards new construction to avoid driving up unnecessary costs.

Important to Remember

While it's fun to make predictions, it's important to remember that no one has a magic ball to predict the future. When trying to decipher where the real estate market is headed, it's important to look market signals such as the changing economy.

Since the housing market tends to cycle between shortages and surplus, factors that impact supply and demand will influence housing market changes. Conditions such as the economy, interest rates, and consumer confidence levels can influence the number of potential buyers. Examining these conditions can help you draw your own conclusions and predictions about the market.


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