U.S. House Prices to Rise Next Year, Trump Effect Unknown so far

Monday, December 5th, 2016
Rahul Karunakar
Reuters.com

Roofers work on new homes at a residential construction site

Roofers work on new homes at a residential construction site. REUTERS/Steve Marcus

U.S. house prices are set to rise almost 5 percent next year, a bit faster than expected just three months ago despite the real prospect of several interest rate increases, according to the latest Reuters poll of property market analysts.

So far the shock election of Republican Donald Trump as the next U.S. president has done little to change overall views on the housing market, with many saying it was too early to tell but also a significant minority saying their opinion had \worsened.

Expectations that Trump’s fiscal stimulus plans, through tax cuts, infrastructure spending and reduced regulation, will elevate inflation and lead to swifter rate rises away from the zero bound by the Federal Reserve. That also has pushed mortgage rates higher.

But the relatively fitful economic expansion since the 2008 financial crisis, coupled with poor wage growth despite a historically low unemployment rate of 4.6 percent, still argues strongly against a return to boom times.

“The housing recovery has made steady progress but remains unfinished, based on the economic recovery and the labor market in particular,” said Robert Denk, senior economist at National Association of Home Builders. “It’s too early to tell what impact Trump’s victory will have on the economy.”

The poll forecast the S&P/Case Shiller composite index of prices in 20 metropolitan areas would close out this year with a 5.2 percent rise. That followed by 4.8 percent in 2017, recouping nearly all of the roughly 35 percent loss suffered during the financial crisis.

Then it is expected to rise by 4.1 percent rate the following year.

The range of forecasts was broadly unchanged compared to the previous poll. But there was a prediction for house prices to fall outright for the first time since 2012.

When asked about their overall opinion on the future of the U.S. housing market since Trump’s victory in the election nearly a month ago, a majority – 14 of 26 – said there was no change, while two said for the better. But 10 analysts said U.S. housing could be worse under the business mogul.

“Our outlook is a lot more volatile now, as very few details exist in terms of future policy. What little does exist tends to skew towards a negative impact,” said Svenja Gudell, chief economist at Zillow.

SPLIT ON RISK

Analysts also were split down the middle on how the risks were skewed to their forecasts. Twelve of 23 analysts said their forecasts carried a “downside” risk and the remaining 11 said more to the “upside.”

The latest survey follows robust housing data. U.S. home resales in October rose to their strongest rate in nearly a decade, at 5.6 million annualized units.

But existing home sales are forecast in the Reuters poll to average only about 5.53 million units each quarter until the final months of next year, held back by a persistent shortage of properties available.

Sales also could slow marginally next year following a run-up in mortgage rates. Mortgage rates closely track movements in U.S. Treasury yields.

Since the U.S. election on Nov. 8, the fixed 30-year mortgage rate has increased nearly 45 basis points to average 4.08 percent last week, the highest since July 2015.

The latest poll showed the 30-year mortgage rate is expected to average 3.65 percent this year, rise to average 4.17 percent next year. It is then forecast to average 4.51 percent in 2018.

While expectations are for mortgage rates to go up in tandem with the Fed rate hikes, the latest consensus was lower than what was forecast in the previous survey taken three months ago.

Higher interest rates and a lack of available credit could continue to keep some buyers – particularly younger and first-time buyers – out of the market.

On a scale with 1 as most affordable and 10 as the least affordable, respondents rated the U.S. housing market a 6 nationally.

“Growing scarcity of available inventory, exacerbated by rising costs of housing production and limited labor availability, create a possibility of a pricing surge if greater economic stimulus is applied,” said Buck Horne at Raymond James.

(Polling by Vartika Sahu and Sarmista Sen; Editing by Ross Finley and Baill Trott)

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