Banks and other mortgage lenders are still wondering how the housing market will fare in 2017. The answer likely will depend on many factors, including if and how much interest rates will rise and government tax and spending policies put forth by the Trump administration, according to experts.
Rising interest rates
Alessandro Rebucci, assistant professor at the Johns Hopkins Carey Business School in Baltimore, said the election of Donald Trump stimulated higher interest rates and has had some impact on the bond market. How much rates will continue to rise depends on the size of anticipated tax cuts by the new president and Congress, Rebucci said.
If the government cuts taxes and increases spending on infrastructure, Rebucci expects there likely will be further interest rate increases, possibly in the double digits.
“When taxes are reduced, the savings of the government decreases,” he said. “That means someone has to chip in and lend to the government.”
Rising interest rates provide an added incentive for private investors to purchase government bonds, in order to finance budget deficits, Rebucci said.
“[With tax cuts] the demand for resources by the government increases and the price of those resources goes up; the price being higher interest rates,” Rebucci said.
The budget deficit plays a huge role in what will happen in the housing market, Rebucci said, because “mortgage rates track closely with government borrowing costs.”
“The market jumped 50 basis points in the Treasury, and around 60 in the mortgage market,” Rebucci said. “The question is—will the budget deficit be more of less than what the market expects?”
But how would rising interest rates impact consumer buying behavior? Quicken Loans Chief Economist Bob Walters said the good news is it’s a sign of a strengthening economy.
“The FOMC announcement showed that the Fed believes that rates are still low enough for consumers to feel comfortable borrowing and spending,” Walters said in an email statement. “Consumers will notice slight increases in the cost of borrowing for auto loans, variable rate credit cards and other items.”
A strong labor market also is essential to the housing market. “The housing market will likely be driven by an improving labor market and pent-up demand in 2017,” Walters said.
But Michael J. Hicks, professor of economics and business research with Ball State University in Muncie, Ind., noted that while the labor market has strengthened it still faces challenges.
“We’re at full employment so the expectation now is that employment growth will moderate to something like 100,000 to 140,000 jobs a month,” he said.
Hicks said the employment outlook still could improve in many parts of the country.
“We have a lot of people working part time, much more than we did in 2005; about 3 million long-term unemployed people; and about 6 million that are marginally attached to the labor force who don’t take permanent employment,” Hicks said.
“Manufacturing employment is down about 5.5 million workers since 2000,” he added. “Small- or medium-sized towns in the industrialized Midwest, rural America and some southwestern cities have not grown or rebounded well from the Great Recession.”
Lower paying jobs plague many Americans who are eager to become homeowners, according to Skylar Olsen, senior economist with Zillow, a Seattle-based company that aggregates U.S. housing data. She said many cities are grappling with housing affordability and how to solve it.
One way to ease this dilemma is through state proposals like inclusionary zoning, which is an up-and-coming trend, Olsen said. “Inclusionary zoning makes it required, anytime you build an apartment, you have to set aside a share of units to be affordable to those making below area median incomes,” she said.
Zoning like this allows communities to build “social mobility” for those who make less money,” Olsen said.
“When someone is born into poverty, for them to become middle class, you need a lot of diverse incomes to live in the same space so you can get social mobility,” she said.
Critics of inclusionary zoning argue it makes apartment buildings more expensive and actually reduces the overall supply of new apartments. However, backers say it helps people on the fringes find a path to the middle-class lifestyle, which boosts the economy.
To help people gain access to affordable housing, many cities also are creating developments with more density, such as multifamily housing near transit lines, Olsen said. “It’s a great place to add multi-family housing (apartments) and condos,” she said.
In places such as Denver, Atlanta, Chicago, Indianapolis and Washington D.C., Hicks said these areas are growing at a brisk pace, largely because their urban centers are growing. However, this rapid growth also can create housing inequities.
“That bifurcation, that split between the very affluent and the struggling households, is very apparent on the fringe of urban places,” Hicks said.
Freelance writer Elise Oberliesen contributed to the writing and research of this article.
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