In 2017, housing supply and pricing will be the key drivers, while demand for single-family housing will remain strong--mirroring 2016. Positive job gains and attractive interest rates continue to bring buyers to the market.
Consumer confidence will improve as employment growth remains positive, interest rates stay attractive, and consumers continue to improve their balance sheets.
On the other hand, supply is struggling to keep up with demand as builders struggle to come back to the market. Moreover, the foreclosure inventory has evaporated and the excess of available existing homes is gone. Coupling these realities with low interest rates is resulting in pricing growth that outpaces inflation. In particular submarkets, with very strong demand characteristics and constrained supply, it is likely that unsustainable pricing exists. In summary, the 2017 housing market will be strong, but buyers should beware of potential pricing "bubbles" resulting from an imbalance between supply and demand.
For example, the National Association of Realtors forecasts that existing home sales will increase 1.6 percent from 2016 levels, while new single-family home sales will increase 9.8 percent nationally. These increases compound the corresponding 2015 and 2016 existing-home sales and new-home sales increases (see Table 1). Housing starts are projected to increase 6.5 percent, with single-family units increasing by 9.1 percent and multifamily units increasing by 1.5 percent. Median home prices for both existing and new homes are expected to increase 3.7 percent and 2.7 percent, respectively. The S&P CoreLogic Case-Shiller Index reported a 5.3 percent annual gain in home prices in August. Portland, Seattle and Denver led the way with the highest pricing gains at 11.7 percent, 11.4 percent and 8.8 percent, respectively. Consumer prices are expected to increase 2.3 percent in 2017, up from 1.2 percent in 2016.
Considering these numbers, one can see the strong demand outpacing starts and the resulting increase in pricing outpacing inflation. Also, one can reason the need for supply to catch up with demand to provide a more reasonable pace of home price increases. The high price increases of Portland, Seattle and Denver show the impact of these dynamics on particular markets that have very strong demand drivers (primarily positive job growth) and weak supply drivers (mainly available land). In these markets, it is likely prices are being driven to unsustainable...