Home prices will continue to rise. Millennials are entering the market. Mortgage rates are still historically low.

Housing Market

2016 was a pretty good year for housing. National prices finally crossed the 2006 peak, mortgage rates remained historically low, and Millennials, a generation which some feared would never buy homes, are beginning to enter the market. Through it all the election loomed large, and in 2017 we’ll see how profound it’s effects.

Homebuyer demand is stronger now than it was at the same time last year, and many housing experts expect housing prices will continue to rise — but more slowly.  Redfin expects the median home sale prices to gain 5.3% in 2017 compared to 2016, which would not be a major change from the 5.5% year-over-year gain expected to close out this year. Zillow is forecasting the median home value to rise 3.2%, and their home value index rose 6.5%.

Home Prices

Home prices continue to post steady year-over-year gains and are nearly back to pre-recession highs. In July, for example, the national median home price for single-family homes and condos collectively was $226,500 – an increase of 7% from a year earlier and the 53rd consecutive month with a year-over-year increase. This is within a half percent of the pre-recession peak price observed in July 2005.

But looking closer at market indicators reveals further truths. The strong national sales price numbers mask a shift in the market where we are seeing home price appreciation weaken in some previously high-flying and high-priced markets while continuing to strengthen in some of the secondary markets.

Case in point: In July, home price appreciation in San Jose and San Francisco was each 5%, the former down from 16% a year earlier. San Francisco was down from a high of a 32% rate of appreciation in July 2013. Meanwhile, secondary markets like Portland, Denver and Seattle all experienced appreciation increases in 2016.

So after several years of steady and steep price growth, we are seeing indications that price growth is slowing and the market is normalizing. Based on these indicators, many experts predict 2017 will bring a more normalized housing market — one that still boasts a healthy number of sales but a moderate rate of price growth.

Market Demand

In bellwether markets across the country, sales volume has been decreasing for several months. This slowdown could be accelerated by rising mortgage rates, but even without rising interest rates we may now be hitting affordability and inventory constraints which will cause demand to slow down. And as demand slows, inventory will gradually increase in 2017.

But even so, there is still a lot of demand right now for moderately priced houses that appeal to both first-time buyers and baby boomers who want to be in a right-sized house for aging. Across the country, most markets don’t have enough houses at or just below the median price in that market.

So in many parts of the country could see a small dip in property values over the next six to 12 months, but real estate, for most people, should still be thought of as a long-term hold with a great tax write-off and long-term appreciation.

Affordability

Many experts believe affordability will worsen. Wages are expected to grow in America’s big cities this year, but the share of homes affordable to someone earning the median income is not. This trend has held back many aspiring to buy their first home over the past few years, and it will be intensified by a continued shortage in low- to moderate-priced inventory and rising mortgage rates. The irony of the housing market is that the places where we are seeing wage growth are places where people can’t live because they are not affordable. There is a mismatch.

A decade ago a mismatch like this would not have been so apparent because buyers could get subprime loans, but now high credit is a requirement. The percent of new listings in the lowest price tier of the market has declined nearly every month in the last five years.

First Time Buyers

Rental affordability is one of the biggest factors driving first-timers into the market. With historically low interest rates, buyers may be able to find a home with a monthly mortgage payment that is less than or equal to rent. There are also tax write-offs that come with owning a home. Furthermore, there are fewer bidding wars and less of a need to escalate significantly above the list price to get an offer accepted. And the pace of the market is also slowing, which helps buyers since they can now afford to be more patient.

Millennials

Members of the Millennial generation, those in the 18-34 age range, have been slow to enter the home buying market. Sidelined by high unemployment, student loan debts, and tight credit, Millennials have a different outlook on home ownership and long-term investment than previous generations. But Millennials are now the largest adult generation and make up the greatest percentage of the workforce. And according to Zillow, half of all buyers are under age 36.

While Millennials face the obstacle of saving up for a down payment, Millennial buyers do have the advantage now of low interest rates and payment assistance programs. If you compare their access to credit and ability to get into a home, it’s far easier for Millennials than previous generations.

Conclusion

Overall, demand continues to remain strong, especially for affordable housing in secondary markets, and housing prices should continue to rise but at a slower pace. Millennials and first-time buyers should be a major part of the 2017 housing market. In recent years, many first time buyers remained on the fence, but the likelihood of continued interest rate increases along with a tightening labor market will drive many of these buyers into homeownership. This should contribute to a steady increase of new home sales, but with a more modest price appreciation.