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Economic Forecasts

Housing: A Seller's Market in Many Cities

Kiplinger's latest forecast on housing starts and home sales

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GDP 2.1% growth in ’17, following 1.6% in ’16 More »
Jobs Hiring pace should slow to 160K/month in '17 More »
Interest rates 10-year T-notes at 3% by end '17 More »
Inflation 2.4% in '17, up from 2.1% in '16 More »
Business spending Rising 3%-4% in ’17, after flat ’16 More »
Energy Crude oil trading from $55 to $60 per barrel in May More »
Housing Single-family starts up 9% in '16, 11% in '17 More »
Retail sales Growing 3.9% in '17 (excluding gas) More »
Trade deficit Widening 4% in '17, after nearly flat '16 More »

The housing market will continue to grow this year at roughly the same rate as in 2016. Modest construction of new housing and the low turnover of existing housing stock will keep inventories lean and price gains hot.

Building constraints will limit the speed of residential construction. Builders face the same challenges as in recent years: lack of available land and lots, labor and lending. Nevertheless, builders are trying to keep up with steady demand for housing. Building permits indicate that further growth is in store for residential construction early in the year. Single-family permits grew 4.7% in December. For 2016, single-family construction rose 9.3% over the previous year, while multifamily starts dropped 3.7%.

See Also: All Our Economic Outlooks

Inventory is likely to remain low in 2017. The nation’s inventory of existing homes for sale has dropped for 19 consecutive months on a year-on-year basis. Limited inventory, particularly for lower-priced homes, has made it harder for entry-level buyers to join the market.

Low inventories and modest economic growth should push up the price of the median home by 5%. Eventually, rising mortgage rates will put a damper on price growth, but that isn’t likely to happen this year, as shrinking inventories create a seller’s market in more metro areas. The S&P CoreLogic Case-Shiller national index rose by 5.6% in November, up from 5.5% for the previous month. The hottest markets in the country remain in the West, as Seattle, Portland and Denver continue to post strong gains. We expect price increases in these areas to start cooling off as buyers become reluctant to buy a home that would eat up a larger chunk of their monthly earnings.

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New-home sales will likely slow down a bit in early 2017 because of higher mortgage rates, but will end the year higher than in 2016. We expect new-home sales to rise by 13% from 2016. This is a slight pickup from the 12.2% increase logged last year. New-homes sales are reported when the contract is signed, whereas existing-home sales are reported when the contract closes, which generally takes more than 30 days. Therefore, we expect to see the impact of higher mortgage rates in new-home sales data first. Mortgage rates rose about half a percentage point after the presidential election. Thirty-year fixed-rate mortgages averaged 4.19% for the week ending January 26, up from 3.79% a year earlier.

Existing-home sales are also likely to slow down at the beginning of the year, but should post a solid gain of 2.9% for 2017. Total existing-home sales reached 5.45 million last year, exceeding 2015’s 5.25 million for a full-year gain of 3.8%. For 2017, we expect total existing-home sales to hit 5.6 million.

See Also: A Housing Shortage Looms as Builders Can't Keep Up

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