Before the election, at Realtor.com we felt confident about the continued health and prospects for the U.S. residential real estate market regardless of who might occupy the White House next year. And we still do.
Why? The economy is expected to continue to grow. The only question is by how much. Most forecasts expect moderate growth, stronger than this year.
Growth will lead to slightly lower unemployment—and that buoys consumer confidence. And growth will also lead to more jobs, which lead to more households looking for homes.
Regardless of exactly how much the economy grows next year, we are now in the midst of two massive demographic waves that will power above-average demand for homes for at least the next 10 years. And neither of these two factors has anything to do with our new president-elect.
The biggest generation in history is the largest buyer of homes in the U.S. This is leading to a recovery in first-time home buyers. The median age of a first-time home buyer this year was 32, according to the National Association of Realtors®’ 2016 Home Buyer and Seller Report.
Next year 4.4 million people in the U.S. will turn 32.
At the same time, we have the second-largest generation in history moving into retirement. We are seeing 65 to 74 as the key age range where housing decisions—often involving a sale and a purchase—are being made. Over the next five years, the number of people in the U.S. over 65 is expected to grow 18%, while the population overall grows only 4%.
To frame what these demographic waves mean, just look at the top reasons why people are actively starting their research now to buy a home in 2017:
They are dead tired of their current home. Indeed, the median tenure of people living in their homes has never been longer. It’s time to make a move—and the economy and housing market have recovered to make that possible.
They consider home prices to be favorable. Prices have recovered in more than half of the markets in the country, so there are fewer bargains. However, consumers believe prices are likely to rise further.
They have had a change in their family circumstances or composition. First kid needs her own room. Elderly parent moved in. Adult child moved out. Another baby is on the way. Sheesh. None of these life events is planned around elections. You can’t postpone needing another bedroom.
They are getting married or moving in with a partner. No one was going to possibly cancel their wedding plans just because Hillary Clinton or Donald Trump were possibly heading to the White House. Right?
The single financial factor that will affect the market the most will be what happens to mortgage rates. The market is interpreting the likely fiscal policy direction as inflationary, so rates have jumped this week. The average 30-year conforming rate is up a quarter of a point so far to its highest level since the beginning of the year.
The key question becomes: Just how high will rates go? Before the election, most forecasts called for an increase of 50 to 60 basis points in the next year. (A basis point is 0.01%.) But in one week, we’re already halfway there!
Higher rates cause higher payments, even if the price, down payment, and loan terms remain the same. This can break a budget and even disqualify potential borrowers by pushing them beyond the limits of the required debt-to-income ratio.
Borrowers can mitigate some of the impact of higher rates by considering other loan types or terms, buying discount points, or putting more money down.
A positive aspect of higher rates is that lenders are likely to become more aggressive at chasing purchase mortgage business. Higher rates give them more potential profit to balance against marginally higher risk. And higher rates will spell the end of the refinance business that has been their primary market for the past several years.
In other words, credit access will likely improve more than we have been seeing in 2017 if this trend continues.
We’re optimistic about the country’s economic prospects under President Trump—as I would have been under a President Clinton. Millennials and boomers will still be buying homes regardless of what happens.