U.S. Real Estate Market Trends Downward, With Lower Incomes to Blame

Call it a "reverse trifecta."

Americans are making less money, are concerned about interest rate hikes and view home purchases as more expensive going into the last two months of 2016. All three factors don't bode well for the U.S. real estate market in 2017, according to one industry source.

Data from the most recent Fannie Mae Home Purchase Sentiment Index show confidence in the residential home market fell by 1.1 points in October - the third consecutive monthly decline in a row. Fannie Mae gives three significant reasons for the slide in homebuyer confidence. This from the report:

 - The share of consumers reporting significantly higher income over the past year experienced the largest drop, decreasing eight percentage points.

- The net share of consumers expecting home prices to go up in the next year fell three percentage points.

- Those who expect mortgage rates to drop and those who are confident about not losing their job each dropped by one percentage point in October.

It's a witches brew of bad news for consumers, who should be driving the real estate market upward, but apparently feel weaker confidence in doing so.

"The HPSI fell in October for the third straight month from its record high in July, reaching the lowest level since March," says Doug Duncan, senior vice president and chief economist at Fannie Mae. "Recent erosion in sentiment likely reflects, in part, enhanced uncertainty facing consumers today."

Duncan says that, since July, more consumers have "steadily expected mortgage rates to rise and home price appreciation to moderate."

"Furthermore, consumers' perception of their income over the past year deteriorated sharply in October to the worst showing since early 2013, weighing on the index," he adds.

The interest rate issue seems to be a particularly touchy issue for home homebuyers, even as real estate professionals say a rise in mortgage rates may not be the purchase-killer some potential homebuyers think.

"Any interest rate rises this year or in 2017 will be minimal," says Glenn Phillips, CEO at Lake Homes Realty, in Pelham, Al. "In fact, a raise may actually create some movement in the housing market by getting people to moving to buy now before rates go up again."

A key benchmark for home sales growth - new construction - may not see a big impact from a Federal Reserve interest rate hike, either. And, if a rate hike does come down the pike, it's a sign that U.S. household incomes are picking up again.

"With interest rates at historic lows, a small uptick in interest rates by the Federal Reserve, in the 0.25% to 0.50% range, is not expected to have significant dampening effect on construction of new homes," says Julian Anderson, president of Rider Levett Bucknall, a real estate and construction advisory firm. "That's especially so, as it will reflect an uptick in general inflation and probably in wage and salary inflation."

Michelle Farber Ross, a managing partner and real estate broker with MMD Realty in the Miami area, says technology have moved housing markets so fast, any blips on the radar screen are easily discounted, as events move at a lightning pace.

"While history has supported an 18-year real estate cycle, the technology-driven market, world events and speed at which we do business has expedited market timelines," she says. "In late 2016 and into 2017, this places us somewhere between expansion and hyper supply mode or boom."

For the past few years, Americans have experienced a surge in wealth, which has also influenced the rise in home prices, Ross says. "Now, we're experiencing the perfect recipe for increased home prices year-over-year, including a strong stock market, easy access to mortgage loans and low interest rates," Ross says. "We're also seeing an increased number of foreign investors and home buyers due to various political, global and economic challenges, like the economic implosion in Venezuela and the Brexit vote in the U.K."

Ross points to the S&P CoreLogic/Case-Shiller US Home Price Index, which shows a steady increase of 5% year-over-year with some markets experiencing increases as high as 12.4%. "If that recipe continues to be followed, the U.S. will continue to see these increases in the future," Ross says.

Of course, homebuyers will know more when they get more clarity from the Federal Reserve on rate hikes, and from home sales numbers after the new year, when purchase activity increases.

But if Fannie Mae is right, and U.S. household incomes are in decline, all bets may be off, as potential homeowners head to the sidelines to wait until their financial situation takes an upward swing.

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