Now that the Earth has made another rotation around the sun, it’s the time of year when we put 2017 behind us and start looking at what 2018 has in store. The housing market is no exception.
Analysts are now starting to take a look at the big questions that will matter in the home market in the coming year. Among the big questions to be answered:
- Where will mortgage rates end up?
- Will there be an increase in available housing inventory and what will it look like?
- How much movement is expected in terms of home values, particularly if you’re in the market to buy or refinance?
We thought we’d do a roundup of the predictions of some of the biggest industry analysts on each of these key questions.
One of the more immediate questions homeowners and prospective buyers may ask is what mortgage rates are going to be like in 2018. While the answer to that question tends to be anyone’s guess, it doesn’t stop analysts from making educated predictions.
Before we get to these, let’s take a quick look at the environment in which they make these estimates.
Federal Funds Rate
The Federal Reserve sets something called the federal funds rate. This is the rate at which U.S. financial institutions borrow money from each other. This is set and negotiated by the banks a little bit, but the U.S. central bank defines a range within which the rate has to fall.
The Federal Reserve has raised rates five times since 2015, after leaving rates near zero for a long time after the 2008 recession in order to stimulate the economy.
Currently, the federal funds rate falls between 1.25% –1.50% after rising three times this year. The idea is that raising interest rates is a check on inflation.
Although not directly correlated, mortgage rates tend to follow the federal funds rate. If this rate is higher, mortgage rates tend to rise with it.
The Federal Reserve releases something called the dot plot at the conclusion of its Federal Open Market Committee meetings. This is a representation of where the committee members expect short-term rates to be in the near future.
The median prediction among the members is that the federal funds rate will rise three times next year to end 2018 at 2.1%.
Mortgage Rate Predictions
Now that we know the backdrop to each of these predictions, where do analysts think mortgage rates will end up in the next year?
Conventional mortgage investor Freddie Mac thinks that 30-year fixed rates will increase to 4.4% by September 2018.
Meanwhile, the Mortgage Bankers Association (MBA) thinks rates for 30-year fixed mortgages will settle at 4.6% by the end of 2018, while rising above 5% in the next few years.
The National Association of REALTORS® believes rates will average 4.6% throughout the year before rising to 5% for the 30-year fixed by the end of the year.
One of the things that’s been causing rapid growth in home prices is the limited inventory of houses available on the market. That’s great for homeowners looking to sell or refinance because it means higher prices or more equity. Unfortunately, it’s not so great for home buyers.
So what’s to be expected in 2018? Let’s take a look at the numbers first and then at Zillow and Trulia’s thoughts on what this market might look like.
Inventory Increases Anticipated
Every source we looked at believes housing inventory will increase in 2018. The market for both new and existing homes is extremely tight right now.
In fact, according to the latest new home sales data, builders saw a 17.5% increase in the number of new homes sold. There’s a measurement of how many months of inventory would be on the market if sales continued at the current pace. Currently, that number stands at 4.6 months. For context, a market is considered in balance at about six months’ supply.
On the existing homes side, things are even tighter. Supply is down to 3.9 months at the current pace. The numbers point to the fact that the market is ready for additional homes to be built, and it looks as if builders are ready to oblige.
The National Association of REALTORS® projects 3% growth in starts on the construction of new homes overall, with 7% growth in the single-family category. The Association also sees 2.5% growth in existing home sales. They predict a corresponding 7% increase in new home sales and that the homeownership rate will rise to 63.9%.
Freddie Mac predicts 6.30 million total home sales this year, up from 6.18 million in 2017. They also predict there will be a higher share of purchase mortgages this year. Refinance volume should decrease, as there will be fewer people refinancing to get a lower rate, if rates continue to rise.
What Will That Inventory Look Like?
Freddie Mac and the National Association of REALTORS® are great for giving us numbers, but in terms of which housing trends are actually expected to prevail in 2018, that’s the domain of Zillow and Trulia.
Zillow says builders will focus on entry-level homes, responding to the demands of millennials looking to get their first place. The number of starter homes in the market has been very low, and that’s primed to change. Zillow says these homes will be in the suburbs because of prohibitive construction costs associated with building in cities.
Inventory of existing homes may not grow as quickly, according to Zillow. Homeowners know that there are limited options available. Because of this, many are expected to remodel their current homes rather than risk not finding what they want in the current market.
Finally, Zillow says millennials and Baby Boomers are going to drive the design of these houses. Millennials want wide hallways for things like children’s strollers, while this same feature will help Baby Boomers age in place with wheelchairs.
For its part, Trulia says there will be more buyers looking to snap up these new homes as the homeownership rate rises to 63.9%. It also says markets in the Midwest and South will be ones to watch in 2018, with big growth opportunities for cities like Grand Rapids, Michigan; Nashville, Tennessee and Raleigh, North Carolina among others.
Low inventory has definitely driven prices up this year. The most recent data shows that home prices are up more than 6% on the year. With inventory rising, price increases are expected to moderate. This is a good thing for home buyers, because price increases have outpaced wage growth to an extent.
Freddie Mac expects price growth to moderate slightly, going up 4.9% in 2018. Meanwhile, in Zillow’s survey of housing experts, the consensus rise was 4.1%. The National Association of REALTORS® has the most conservative estimate, forecasting a rise of just 3.2%.
What’s really going to happen? The answer will have to come in time, but for now, those are a few of the things we’ll be keeping our eye on throughout the year.
If you’re looking to buy or refinance, you can get a really good rate right now. If you think you’re ready, you can apply online through Rocket Mortgage® by Quicken Loans. If you’d rather talk to one of our Home Loan Experts, we’d be happy to take your call at (800) 785-4788. You can leave any questions for us in the comments below.
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