I’m going to share my thoughts with you regarding what we may see in our local real estate markets over the next year based on the statistics from 2016 and my past years of experience. Of course if there is some major national or international economic disturbance in the force, all bets are off – hopefully we won’t run into something like that this year.
The Factors Involved
There are a few factors which help determine the strength or weakness of a market and which way sales and prices will go.
One is demand. There is still a strong demand especially in the lower and middle price ranges. Demand for homes in the higher price ranges began slipping in 2015 and continued during 2016. In 2017 this trend will most likely continue although if there are changes to the federal tax rates that may result in a rebound of the demand for homes in the luxury price ranges.
A second factor is supply. We often refer to this as inventory and speak in terms of Months of Inventory. This is a way of measuring whether the advantage is on the seller’s side (below 6 months inventory), on the buyer’s side (above 6 months of inventory) or if we have a balanced market (around 6 months of inventory). We have been in a seller’s market for a few years now (with inventory levels in the 2-4 month range most of the time) and I don’t see this changing significantly in 2017. With prices going up as much as they have you would think that there would be more people selling their homes, however, there are real reasons that homeowners are holding on to their homes longer than before and will continue to do so during this next year.
A third factor is affordability. You may think this means the same as prices, but that is only one part of the affordability factor. The 3 parts to affordability are 1) prices, 2) interest rates and 3) wages. The largest percentage of buyers are ones who finance their purchase to some extent or another and so that percentage of buyers will pay attention to what their monthly mortgage payment will be even more so, in many cases, than the price of the home they are buying. It is fairly typical for a buyer to have a ceiling set for their monthly mortgage payment and then working backwards from THAT they determine what price of home they can afford. When interest rates are low, like they have been for several years, buyers can and will buy more expensively-priced homes than they would have at a higher interest rate because the monthly payment is ‘affordable’. This, along with strong demand and low inventory, has allowed prices to increase over the past few years in the way they have. However, this means that when interest rates start going up that what will be considered to be ‘affordable’ will not be the same as it is now and most likely price increases will slow, stall or even reverse.
Interest rates went up almost 1/2 percent after the election and we will probably see another 1/2 percent increase spread out over the middle and second half of 2017. When interest rates have an initial increase that is relatively small there is often an increase in demand and sales initially. The reason for that is the buyers who had been sitting on the fence decide they’d better act before there is too much of an increase in interest rates and so there is an increase in buying activity and we will probably see that in the Spring and Summer.
However, when interest rates get closer to 5% what is likely to happen is that sales in the upper price ranges and the upper half of the mid price ranges will start to slow down and sellers will start having to do more price reductions to get their homes to sell than they have over the past few years. Homes in the lower part of the mid price ranges and those in the lower (more affordable) price ranges will not be affected as much and those which are truly a good value will still sell quickly and likely with multiple offers.
Each area has its own local market and there will be some that continue to grow in 2017 and will be strong while others will see more price reductions and longer times on the market. One other factor to keep in mind is that our area is a popular second home and retirement area and so that will add some strength to the market that won’t be seen in other areas of the country.
Advice for Sellers and Buyers
For sellers who have procrastinated, waiting to see whether they can get more this year than they would have last, it would be smart to sell in the first half of the year if possible. Since it takes about 3 months from the point where you start working with your listing agent to a closed sale (if you and your agent do things correctly), that means you should make your decision by no later than the end of winter and take action by no later than the end of May. If you have thought of selling but have concerns about your particular set of circumstances then you should still try to make your decision one way or the other within the next few months – contact me with your concerns if you just can’t seem to make a decision and I’ll either tell you your concerns are valid and you shouldn’t sell now or will give you some possible solutions to your concerns if there is a way to do what you want to do.
You should also make sure, if you do sell this year, that you price your home appropriately as that can make a huge difference in what you walk away with (see my article this month on why the initial list price will determine how much you get from your sale).
For buyers, you should make sure you are fully prepared to buy. If you will be getting financing but haven’t yet gotten preapproved, don’t even think about going out to seriously look at properties. If you want to be successful buying, you will need to have a good understanding of the local markets you are looking in so that you are realistic in your approach and don’t lose a lot of time trying to operate as if the market was different than it is.
Whether you are buying or selling you deserve the most professional representation possible and I will be happy to make sure that your interests are watched out for. Feel free to email me at firstname.lastname@example.org.