2016 was a record year for home sales. With an average of 52 days on market, homes were quickly coming off market, resulting in numerous bid-wars. Experts in the industry credit the high demand combined with low mortgage interest rates as the fuel that fed the housing market last year. Additionally home prices are almost back to their pre-recession peaks. So where does that leave us for 2017?
In short, no one can really agree. Some say home prices will level off and others are predicting even an even hotter, faster year than 2016. There are a lot of factors that come into play when trying to predict what will happen in the coming year for housing.
Interest rates are rising though only by a very small percentage and that should slow the market down a bit. There’s also the issue of the Dodd-Frank Wall Street Reform. This reform creates a slower process for a buying a home. A real estate purchase that took 30 days before now takes 45. In addition, Some of the highest performing markets are showing signs of weakening as areas that were seeing double digit year over year increases in real estate values are now seeing half of those numbers, a clear sign of cooling off.
Then there is the issue of affordability. In most major metro areas, home prices have continued to soar well beyond what is considered affordable. While there are some flaws with how we calculate affordability there is a general rule that if you’re spending more than 30% of your income on housing it’s not affordable. Let’s look at the San Francisco Bay Area for example. The average mortgage in the Bay Area is roughly $4000 and the average monthly income is $7,150 (after taxes). This comes to an astonishing 56% of the average homeowners income. While the bay area is an extreme example it’s not an uncommon theme.
Despite these rather bleak prospects there are others who are much more optimistic about 2017. For example, Redfin is predicting that 2017 will be a much better year for real estate due to the increasing popularity of online bids for homes. Others cite new offerings on large mortgages which offer only 1-3% down saying it would put more buyers on the market. And even more claim that rising rents will push more people towards purchasing a home.
What does all this mean for you if you’re looking to buy a home in 2017? Well it’s hard to say. Everyone has a different situation and there are simply too many transactions that happen in a given year to offer any level of real prediction. But as it stands, we think the market looks to continue to grow albeit at a much slower pace. We think this is especially true in the major metro areas as affordability becomes a driving factor to keep prices lower. So if you are looking for a forever home then go for it. If you’re looking to flip a home for a 20-30% return then you might want to put on the brakes.