Rising mortgage rates will have the most impact on the housing market in 2017, according to expert opinions recently assessed in Zillow's Home Price Expectations Survey, followed by limited housing supply and shifting demographics.
Rising rates, markedly, affect both sides of the transaction—as rates increase, homebuyers are further extended, while sellers hold off on listing to avoid a higher-priced mortgage. The experts surveyed expect the most significant changes to come when rates reach 5.5 percent. According to Freddie Mac, rates currently are in the neighborhood of 4 percent.
"Rising mortgage rates, inventory shortages and demographic shifts will be the main drivers of the U.S. housing economy this year, especially for first-time buyers who will face tougher competition for entry-level homes and often operate with a tighter budget than move-up buyers," says Zillow Chief Economist Dr. Svenja Gudell. "When you combine higher mortgage rates with increasing home values, mortgage affordability starts to suffer, and buyers will have to spend more and more on their monthly payments. This makes it even more important for buyers to prepare their finances, and shop around to make sure they are getting the best possible rate."
Seventy-seven percent of homebuyers obtain a mortgage to finance a home purchase, according to Zillow—this widespread use, experts agree, will amplify the effects of rising rates on home price appreciation.
"Compared to their outlook in our previous survey just a few months ago, most of our panelists now expect somewhat stronger home value appreciation this year and next, as tight inventory conditions persist," says Terry Loebs, founder of Pulsenomics, which partnered with Zillow on the survey. "However, longer-term, the consensus still calls for decelerating prices, with the most pessimistic quartile of experts continuing to project negative inflation-adjusted returns for U.S. housing beyond 2017. The specter of rising mortgage rates and other affordability hurdles are clearly impacting these home value projections."
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