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Rising rates main catalyst for 2017 housing market, experts predict

More than two-and-a-half months into the new year, mortgage rates aren't too much different from where they left off in 2016. However, real estate experts largely agree that they're expected to increase, and once they do, the fallout will be the single-biggest influence on how the housing market performs in 2017, a newly released survey suggests.

Over 100 housing experts recently participated in a poll commissioned by home listings website Zillow and were asked to opine on what they believed would have the biggest impact on home sales. The majority pointed to the degree to which mortgage rates increase.

How high will rates rise?
For the past several years, mortgage values have dwelled in historically affordable territory. Through the first 11 months of 2015, in fact, 30-year fixed-rate mortgages never broke above 4 percent, according to archived data maintained by lending giant Freddie Mac, and in 2016, this 4 percent threshold was breached for the first time in the immediate aftermath of Election Day.

However, with the economy in better shape and economists predicting that the Federal Reserve will raise key interest rates at some point in 2017 – an action which historically has influenced mortgage affordability – real estate experts anticipate rates may venture to territory last witnessed in early 2010, when 30-year FRMs averaged 4.8 percent throughout the month of December.

"Rising mortgage rates, inventory shortages and demographic shifts will be the main drivers of the U.S. housing economy this year, especially for first-time buyers who will face tougher competition for entry-level homes and often operate with a tighter budget than move-up buyers," said Svenja Gudell, Ph.D., Zillow's chief economist. "When you combine higher mortgage rates with increasing home values, mortgage affordability starts to suffer, and buyers will have to spend more and more on their monthly payments. This makes it even more important for buyers to prepare their finances, and shop around to make sure they are getting the best possible rate."

Home prices have risen for 58 months in a row
As Gudell referenced, home prices have maintained a steady track higher for well over four years. Indeed, as chronicled by the National Association of Realtors, median home values in the U.S. have risen on a year-over-year basis for 58 consecutive months as of December, the latest month in which data is available. In 2016 as a collective, home values increased nearly 7 percent, a trend that is expected to continue in 2017, but to a slightly lesser extent rising 4.6 percent, according to Zillow's best estimates.

Terry Loebs, founder of Pulsenomics, an independent research firm, indicated that the slow but steady rise of asking prices on for-sale properties has largely stemmed from meager supply levels, which continues to hamstring an otherwise healthy market

"Compared to their outlook in our previous survey just a few months ago, most of our panelists now expect somewhat stronger home value appreciation this year and next, as tight inventory conditions persist," Loebs explained. "However, longer-term, the consensus still calls for decelerating prices, with the most pessimistic quartile of experts continuing to project negative inflation-adjusted returns for U.S. housing beyond 2017."

He added that these latest projections are fueled by the potential for mortgage rates to become somewhat less affordable in 2017, which would presumably decrease demand and slow further home price increases.

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