Peering into 2017: The Outlook for U.S. Housing and Mortgage Markets – Home Prices Projected Up 5%, Rent Up 3%, and Purchase and HELOC Originations Up

Economic growth will be a primary factor affecting the housing market in 2017. The latest projections show a consensus that the economy will grow between 2 and 2¼ percent next year.[1] With this as a backdrop, here are five features to look for in next year’s housing market.

First, mortgage rates will be higher, with fixed-rates averaging just over 4 percent for 2017, about one-half percentage point higher than in 2016 for both single-family and multifamily loans. The Federal Reserve is widely anticipated to hike its federal funds target by one-quarter of a percentage point this month, with additional increases during 2017. This will increase the cost of loans tied to short-term rates, such as home equity lines of credit, also known as HELOCs.

Second, vacancy rates will likely remain relatively low in the rental market and decline in the homeowner market. The low level of single-family building means that for-sale inventories will remain lean in many markets.

As a consequence, a third feature to expect is home-price appreciation in most markets, with rent growth also continuing but at a slower pace. For the coming year, we expect the CoreLogic Home Price Index for the U.S. to rise about 5 percent, although some neighborhoods will have double-digit growth and some will experience declines (Exhibit 1). CoreLogic’s Repeat Rent Index rose 3.3 percent last year through October, and the consensus view is for rent growth to moderate to 3 percent in 2017 as builders complete new rental homes (Exhibit 2).[2]

And with higher mortgage rates reducing incentives to refinance, a fourth feature to expect is a drop in refinance originations in 2017. This drop will be at least partly offset by higher purchase-money volume and second liens, either HELOCs on single-family or mezzanine debt on multifamily.

Fifth, we expect the new loans made to continue to have relatively low credit risk. Using CoreLogic’s Housing Credit Index, we found that new single-family originations during the first half of 2016 collectively had lower risk attributes than those made 15 years ago (Exhibit 3). Nonetheless, the switch to a higher purchase share of new lending in 2017 raises the specter of heightened fraud risk, even though risk attributes may continue to look favorable.

Best wishes for a healthy and successful 2017.

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