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Mortgage-market trend lines look solid for 2017

Interest rates have moved up rapidly since the Nov. 8 election. Steve Hovland, director of research for the investment management company HomeUnion, spoke with Scotsman Guide News about why he expects the market to settle down and why he believes the changing political landscape will have little impact on the housing market next year. Hovland

Do you expect the recent big jumps in mortgage rates to continue?

I think the market will settle. Last year, we saw a 30 basis point rise in interest rates right about the same time, and that came as the market priced in the Fed’s December [2015] rate hike. This year we have seen a 50 basis point rise. So, more than half of this rise is expected. Right now, the market is prepping for a 91 percent chance of a rate hike in December. The other part of the interest rate increase is due to uncertainty, and not knowing what the president-elect’s plan is for next year. As those plans come to light, we’re going to see the market settle a little bit and relax.

About the election, there is much speculation about what Donald Trump and the Republican Congress might do. Could this have much impact on the housing market?

Historically presidential elections haven’t had a huge impact on the housing market. I don’t think we are going to see much of a change here. Trump has called for lighter regulation, which isn’t really unanticipated because he was a real estate developer before he started moonlighting as a reality TV show host. The president is not really in a big position to exact a lot of change on housing. The meaningful impact for housing will probably come several years down the road.

As for the market for single-family homes, what do you expect for next year?

I think it is going to remain healthy. There is plenty of demand out there from both traditional homebuyers and investors. We also saw a nine-year peak in new-home construction in October. A lot of that was multi-family, but we are seeing some new supply coming online, which will relieve some of the pressure in the market. As interest rates go up over the course of 2017, that is going to knock down some of that demand. So, supply and demand will remain relatively balanced. I think transaction activity will stay relatively flat.

So, you are not that concerned about rising home prices, then?

No, I don’t think prices are going to keep rising at near the rate that they have been. We are predicting a 4 percent increase in existing-home prices next year.

Multifamily starts were up dramatically in October. What is your sense of that market?

Yes, we saw a 75 percent increase month-to-month in starts for multifamily. I think that market is reaching a tipping point in a lot of areas. Construction is finally going to surpass demand for the first time since 2009. That won’t impact the market in the beginning because vacancy nationwide was at 3.5 percent in the third quarter. So, there is room for vacancy to go up. I think apartment owners will be able to get about 4 percent rent growth in 2017 before having to tap the brakes in 2018.

Will investors be active in the real estate market in 2017 or will they pull back?

I don’t think they want to pull back, but we are going to see investors start to require concessions from sellers as borrowing costs go up. That is going to create a disconnect between buyers and sellers early on in 2017, as sellers look for prices that were there a few months ago, and buyers are saying, “No, I need a bigger spread.” I do think that sellers who are trying to time the market will suddenly come back and be aggressive with pricing while that demand is still there. Buyers will still want to capture historically low rates, if not the lowest. So, we will see a pretty robust market in the second half of the year as both sides are very motivated.

Are there any major threats that could disrupt the market?

There are a few risks to the market right now, especially with the commercial sector. We are seeing very low cap rates that don’t justify operations, [such as] in the office market. If we see weakness emerge in office or retail, that could have contagion to other parts of real estate, but I don’t think that is very likely. The other thing that could happen is a recession, but we are not forecasting a recession until 2019 at the earliest.


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