Will 2017 be the year sales turn south? 4 ways to anticipate the markets

There are good reasons for having short expectations for sales this year.

The reasons

The multi-year honeymoon of mortgage rates consistently south of 4 percent are clearly over, and Federal Reserve Chair Janet Yellen has made it clear the Fed is set on a policy of gradual rate increases this year.

Painfully low inventories of homes for sale will continue to cripple sales at least through the first quarter, as early reports suggest new listings are coming in fast enough to fill the depleted state of supplies at the end of last year (see “December’s numbers are in: How’s the real estate market looking?“).

Prices have now reached their all-time peaks, which is good news for owners but not so good for many buyers whose incomes aren’t keeping up and who are getting priced out of many local markets.

Then there’s the new administration and Congress, both of which won millions of votes on the promise of strengthening the economy.

Even though it enjoys bi-partisan support, a new infrastructure program designed to jump-start jobs and economic growth has yet to be reported out of committee on either side of the aisle. It’s already too late for a new federal infrastructure program to pass Congress and get rolling in time to make much of a difference in home sales over the first half of the year.

What do economists say?

Housing economists are human, and goodness knows no one bats 1.000 on forecasts. At the beginning of last year, economists heading up the nation’s most prestigious housing research operations at Fannie Mae, Freddie Mac and the National Association of Realtors (NAR) predicted that after a 6.2 percent sales increase in 2015 the current run of rising existing homes sales would slow to 3 percent growth or less through 2016 and perhaps continue through 2017.

An inevitable rise in rates, the chronic problem of inventories, low income levels prices pumped up by supply shortages and the natural tendency for markets based on supply and demand to correct themselves after sustained periods of growth were all contributing factors.

They were off. Existing sales increased by more than 3 percent — a drop from 2015 but still the highest total since the height of the boom in 2006.

Unforeseen events like Brexit drove rates down, and during the year the Fed took no action to raise them. Brisk sales from September through November suggested that many buyers who planned to get into the market in 2017 were “buying ahead” to beat rising interest rates in the fourth quarter.

Many of those same experts are forecasting slower growth of sales again this year. If so, will this be the second straight year the growth of sales has fallen — the beginning of a multi-year downward trend?

In the months ahead, here are four factors to monitor as conditions change.

Are inventories improving?

If there aren’t enough homes to meet demand, it’s a sure bet sales will fall.

At the end of 2016, inventories of existing homes were at the lowest level since NAR began tracking the supply of all housing types in 1999. Inventory is 6.3 percentage points lower than a year ago.

You can track inventories in your local market through market reports offered by your MLS. Nationally, you can monitor monthly existing home sales reports from NAR, and the Federal Reserve charts NAR data each month, too.

Is buyer traffic strong?

New sales contracts with buyers, traffic at open houses, lockbox data — these and other pieces of information from brokers provide a way to check the pulse on demand.

Every month, NAR publishes the Realtors Confidence Index, which includes buyer and seller reports based on a survey of thousands of Realtors.

Are pending sales accurate?

Many MLSs and NAR report pending sales contracts accepted by sellers. These are forward-looking indicators that can be useful predicting closings over next one to three months.

Many pending sales have a significant fall-off before they close. The greater the difference between pending sales reports and closings, the softer the market.

Are the experts changing their forecasts?

Housing economists aren’t always right, but they still have better data than the rest of us.

Some update their forecasts on a monthly basis. Monitoring changes in their forecasts for home sales is a great way to get a sense of how the experts believe macro events like mortgage rates and employment trends may impact sales.

Here are forecast pages for NAR, Fannie Mae and Freddie Mac.

Steve Cook is editor and co-publisher of Real Estate Economy Watch. Visit him on LinkedIn and Facebook.

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