Uncertainty reigns supreme in Freddie Mac’s January 2017 Outlook report for the housing market.
Following the best year in housing for the past 10 years, Chief Economist Sean Becketti said prospects remain good for future growth. However, unease and ambiguity gives them pause.
“We must grapple with uncertainty about fiscal policy, foreign investments in U.S. real estate, and the size of the mortgage market. Among the many uncertainties we highlighted, however, a smaller mortgage market in 2017 than 2016 seems most certain."
The Outlook issued by Freddie Mac said much of the uncertainty comes from concerns surrounding the future of economic policy under the new Donald Trump administration.
“While we still do not know all the parameters of the fiscal policy changes, the assumption is that an expansionary policy will boost both growth and inflation over the next two years and that corporate tax reform will increase long-run potential economic growth by about two-tenths of a percentage point,” they said. “President Trump’s tax proposals include increasing standard deductions and flattening marginal personal income tax rates. Increasing the standard deduction will reduce the number of households who find it advantageous to itemize deductions. This will reduce the homeownership incentives that comes from the mortgage interest deduction.”
Recent appreciation of the dollar has made U.S. real estate more expensive to many international buyers, according to Freddie Mac’s statement.
“It remains to be seen if foreign buyers will still seek to invest in U.S. real estate if the dollar trend continues in the future,” they said. “A contraction in foreign demand would have a small impact on many U.S. housing markets, but it would have a significant impact on particular markets that are more reliant on foreign investors.”
The Outlook states Freddie Mac expects mortgage origination volumes to decline in 2017 relative to 2016 and origination volume to stabilize at a lower level in 2018. The decline in overall mortgage activity will be driven by a sharp reduction in refinance activity, which they forecast to fall more than 50 percent from about $1 trillion in 2016 to about $425 billion in 2017.
“Upheaval associated with the Brexit vote last June helped to keep rates low throughout the summer,” they said. “Could we see a repeat in 2017? There are key elections in France, Germany, and the Netherlands this spring that could potentially shock markets like the Brexit vote last year. We don’t know how these elections will go and how bond markets will react, but they have the potential to drive long-term interest rates here in the U.S.”