With interest rates increasing by nearly a full percent since the election, change is in progress. The new presidential administration is poised to spend money on the U.S. infrastructure and lower taxes, a recipe for increased inflation. As a result, many experts are anticipating more Federal Reserve hikes in the short term rate, which will be accompanied by a rise in long term rates as well. They made an initial hike in December and are poised to make a few more in 2017. Long term rates are not immediately impacted by changes in the short term rate, however multiple increases will definitely have an impact on the Orange County housing market.
Here’s the forecast:
Interest Rates – in December of 2015 the Federal Reserve hiked interest rates and then hinted at four more in 2016. That did not happen for a variety of reasons. Initially, it was for economic reasons, but that shifted to not hiking during an election cycle. Yet, since the election, interest rates climbed on their own accord. Investors around the world pulled their money out of long term bonds and moved into stocks that would benefit under a new administration. Rates rose to as high as 4.5%, but have eased slightly recently. The Federal Reserve meets eight times per year and it will most likely pull the trigger on further increases three more times in 2017: the first one probably in the spring, the second at the start of summer, and the final one coming during the holidays. By year’s end, expect interest rates to eclipse 4.75% and may even climb to 5%.
Active Inventory – the year will begin with a very anemic inventory that will translate to a good start for housing. Yet, with the prospect of inflation, the Federal Reserve will be inclined to pull the trigger and raise rates, most likely two more times by mid-July. Long term rates will rise as well. Buyers will be less inclined to budge from paying more than the Fair Market Value for a home. Higher rates clamp down on affordability. As a result, the active inventory will climb beyond the 8,000 home mark for the first time since 2011 and appreciation will slow considerably. Expect the inventory to peak in August between 8,500 to 9,000 homes.
Demand – initially, with an anemic inventory and buyers anxious to cash in on historically low rates before they rise further, demand will be strong during the Spring Market. Buyers will be willing to stretch slightly in price compared to the most recent sale; so, expect appreciation around 2% during the first 6-months of the year. As the Fed increases rates, buyers for the second half of the year will not want to overpay and will zero in on the Fair Market Value for a home. Demand will fall slowly and appreciation will be flat for the second half of the year.
Housing Cycle – the housing market will follow a normal housing cycle. The strongest demand coupled with plenty of fresh inventory will occur during the Spring Market. This will be followed by less demand and a continued new supply of homes in the Summer Market. From there, demand will drop further along with fewer homes to enter the fray in the Autumn Market. Finally, all the distractions of the Holiday market will be punctuated with the lowest demand of the year and few homeowners opting to sell.
Closed Sales – the number of successful, closed sales will be slightly fewer than 2016. There will be a similar number of “move-up” sellers, which will prove to be a wise decision as mortgage rates rise in the future and affordability starts to erode.
Luxury Market – luxury sales will drop slightly from 2016’s record. There will be a buildup of inventory in the upper ranges and the overall market will feel sluggish.
Distressed Inventory – the distressed inventory will remain low with a very similar level of successful short sales and foreclosures, representing just a few percent of all sales by year’s end.
The bottom line, 2017 will feel a little slower than the past couple of years. At first buyers will be lining up to take advantage of the end to low rates, but as affordability erodes, so will the buyer’s appetite to pay much more than the Fair Market Value for a home. The inventory will rise on the backs of sellers pushing the limits on price. The market will move from a hot seller’s market for the first half of the year, to a market all about price. As the inventory rises, appreciation will come to a halt and Orange County will be poised to move from a seller’s market to an equilibrium market, one that does not favor a buyer or seller.
Happy New Year! Whatever your real estate needs are in 2017, feel free to call, text or send me an email. Thank you for watching my video and make it a great day!