Well, another year has passed, and not just any year. Some have referred to 2016 as the worst year ever, though I’m a little more optimistic.
Anyway, it’s time to look forward to see what the future holds for mortgages and real estate in 2017.
I think I did pretty well last year – I said mortgage rates wouldn’t go up much if at all, and that was true until the election. So I got burned late on that one.
Otherwise, a lot of my predictions seemed to be on point, though I seemed to jump the gun on a couple that will probably come true this year.
Without further ado, let’s talk about 2017…
1. Mortgage rates will pull back, but end up higher
I’ll address the elephant in the room first; mortgage rates. My expectation is they’ll rise in 2017, but also pull back at some point, likely in the first half of the year.
The incoming administration, along with a number of geopolitical events worldwide, will surely create the uncertainty necessary to drive rates lower. This means there will be opportunity to refinance and/or buy a home with a lower mortgage rate than what is currently on offer.
The trick here will be timing it because I do think we end 2017 with higher mortgage rates, though hopefully still below 5% on the 30-year fixed. That would be less than a .50% increase from current levels.
2. Less refinancing
This was one I got wrong last year. I expected mortgage refinancing to dry up in 2016 but the numbers were solid thanks to low mortgage rates for much of the year.
However, mortgage rates finally experienced a meaningful rise, which means the refinance party is likely over. The saving grace might be cash-out refinancing (as homeowners tap newfound equity) and last minute shoppers attempting to lock-in rates before they rise any further.
3. Fewer 15-year fixed mortgages
Because mortgage rates are higher and only expected to increase, I predict fewer homeowners will select the 15-year fixed when refinancing or purchasing a home.
For most folks, the option will be too expensive, and for others it’ll make sense to slow repayment of the mortgage in a rising interest rate environment. This is significant because the 15-year fixed was hugely popular during the recovery, perhaps marking an end to that phase once and for all.
4. HELOCs will get more expensive
This is less a prediction as it is a foregone conclusion. Now that the Fed has tested the waters by increasing key interest rates once a year over the past two years, several more increases are on the books for 2017.
If you have a HELOC, the low-rate party is over. The Fed is widely expected to raise rates three times next year, which means borrowers will face rates 0.75% higher on their HELOCs.
For those with a HELOC tied to prime that enjoys a rate of say prime plus 1%, their current rate of 4.75% (just recently 4.5%) will rise to 5.5% within a year. The silver lining is that banks might offer specials like prime minus 1% to entice new customers.
5. More ARMs
I expect adjustable-rate mortgages to gain steam in 2017 as they did last year. Per MBA data, the ARM-share was 4.7% in the first week of 2016 and 6.5% in the most recent data release before Christmas.
While not a huge jump, I do expect a lot more borrowers to go with ARMs when they take out mortgages in 2017 due to affordability concerns. I can’t say it’ll hit double-digits, but it’s certainly possible if rates keep climbing and lenders start pitching the products harder.
The ARM-fixed rate spread is still pretty weak, but if it widens expects borrowers to ARM themselves.
6. Underwriting standards will ease
Speaking of affordability, I expect mortgage lenders to ease lending standards in 2017 to combat higher borrowing costs.
It’s going to cost more to borrow next year, so lenders will need to get more aggressive to approve more loans. This might mean that higher DTI ratios will be acceptable, or that non-QM lenders (and portfolio lenders) will get more flexible to fund loans that don’t fix the traditional credit box.
The Trump administration may usher in looser lending as well, peeling back some of the recent regulations put in place to avoid another market meltdown.
7. Another FHA premium cut
This didn’t happen in 2016, as many anticipated, but it’ll probably happen in 2017. If it doesn’t take place in the next couple days, my 2016 prediction will be officially wrong.
However, some think Obama will direct a cut on the way out the door, but such a move isn’t without controversy.
In short, critics believe another cut will just fuel further rampant home buying in an already overheated market. It will also put pressure on the FHA’s insurance fund, which could be a problem if/when home prices pull back and mortgage defaults rise.
8. Low/poor housing inventory
Turning to real estate, I expect 2017 to be another bad year for home buyers. I say bad because the selection of homes for sale will continue to be poor.
While mortgage rates are still historically low, and prices still affordable, the quality of homes for sale has declined in recent years. In many markets, you’re seeing old-timers letting go of properties after 30-40 years. These properties often haven’t seen an update over that period, yet they’re still being listed for top dollar.
The other side of the market is flips that were purchased, often less than a year earlier, which are now being sold for a hefty premium, sometimes 50% or more.
If you’re a buyer, be wary. Don’t ditch contingencies and bid over asking until you’ve done all your homework on the property in question. Gone are the days of everyone winning no matter what they bought.
9. Frenzied home buying
Despite my warning, I expect frenzied home buying in 2017. After all, there’s finally an impetus to buy before it’s too late; higher mortgage rates.
I expect a lot of fence-sitters to jump off the fence in 2017 and join boomerang buyers (those eligible to buy again after losing their previous homes), Millennials, and everyone else vying to snag a home for fear of missing out.
With the aforementioned poor and limited inventory in place, it’s the perfect set-up for bidding wars and overpaying, all for a less-than-ideal property.
10. Home prices will rise, potentially by a lot
That being said, I do expect home prices to continue to rise through 2017, despite some hiccups here and there. Put simply, there are just too many buyers chasing too few homes.
And because still-low mortgage rates are keeping mortgage payments historically affordable, prices will continue to march higher. Everyone expects gains to taper off, but I can envision 2017 being another excellent year for the reasons already mentioned.
Bonus: Mortgage lenders will increasingly partner with real estate companies
Here’s one bonus prediction to add to the list. I expect the trend of mortgage companies partnering with real estate agents to heat up as the refinance market drys up and purchase mortgages take center stage.
We’ve already seen it with Motto Mortgage, and Quicken’s sister company In-House Realty just acquired OpenHouse Realty Inc., a technology platform and real estate listing site (and licensed real estate brokerage). Expect more of the same next year.
Whatever happens, I hope everyone has a prosperous 2017!
(photo: Maman Voyage)