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First American predicts rate increase to bring cool-down in 2017

Home sales for November are up, but not at full potential

Potential home sales increased in November to a seasonally adjusted, annualized rate of 6.1 million. This is an increase of 103.5% from the market’s low in December 2008, according to the Potential Home Sales model from First American Financial Corp., a provider of title insurance, settlement services and risk solutions for real estate transactions.

The increase is 4% higher, or 233,000 more sales, than last year. However, there is still room for growth. Potential existing-home sales still hovers at 98,000, or 1.6% below the pre-recession peak in July 2005.

In fact, the market for existing-home sales is underperforming by 8.4% or about 515,000 sales, according to First American.

“The market potential for existing-home sales continues to grow based on the strength of the broader economy, particularly wage growth, as well as improving access to credit,” First American Chief Economist Mark Fleming said. “But, the market continues to underperform its potential, primarily a result of persistently tight inventory.”

“The post-election ‘Trump Bump’ in long-term U.S. treasury yields that triggered mortgage rates to rise above 4%, as well as the increase in the Federal Funds rate last week, will likely have a modest cooling impact on potential home sales heading into 2017,” Fleming said.

However, this prediction flies against many other economists’ predictions, which say that the housing market will pick up even more in 2017. Click here to read forecasts from other economists.

“While rising rates reduce affordability for potential first-time homebuyers, the expected moderation of price appreciation will align house price growth more closely with recently increasing income growth to help offset reduced affordability in the year ahead,” said Fleming.

So just how much will this rate increase affect home sales in the year to come? Fleming estimates it could bring a decline of a full percentage point in house price growth rate in 2017.

“The post-election increase in mortgage rates, while not yet impacting sales activity, is expected to slow the pace of existing-home sales and house price appreciation in 2017,” Fleming said.

However, an uptick in construction could still ease housing inventory and push home sales forward next year. December brought with it the highest level of builder confidence since 2005, according to the National Association of Home Builders/Wells Fargo Housing Market Index.

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