Real Estate Outlook for 2017
Local real estate professionals give their perspective on the year ahead.
Last January BUILD talked to several Des Moines-area builders and developers to get their predictions for 2016. This year we hear from the real estate community.
According to Realtor.com, although the housing market will continue to rise, that improvement will slow, and first-time buyers will face greater challenges to financing. Midwestern cities, however, are expected to lead the list in growth, with Des Moines being one of the hottest areas in the country.
Here’s the real estate outlook for 2017 from a number of local professionals in the field and why central Iowa is on that growth list.
Brennan Buckley
President, Iowa Realty
Changes in interest and politics
“I don’t see politics and the presidential change having a monumental impact. Americans, and Iowans in particular, have come to understand that there are always uncertainties, but that’s almost normal. Iowans tend to focus on the local situation. And things like population and job growth are good here, so there’s a confidence economically.”
Buckley expects interest rates to continue to rise, but he doesn’t see that as a concern for 2017.
Pricing and lot availability
“Affordability of financing is still at historic lows, and home prices in the metro are one of the most affordable in the country.”
He says that rising costs in new construction are definitely affecting the market. “There’s no question that new construction prices will continue to rise with land and construction costs increasing. There’s a real opportunity there for builders who create affordable new homes for first-time buyers and millennials.”
On the other hand, he says, “Any time new construction prices rise, resale opportunities for entry-level homes improve.”
Inventory levels
“Inventory is still low, but this will begin to balance throughout 2017, though probably not return to really strong numbers until next year.”
Because of this, the seller’s market will continue for at least the next year, he believes. “The Des Moines metro is outpacing the national housing market for affordability, and we’re at a wonderful tipping point toward even greater growth over the next 20 years or more as we continue to be attractive to new residents and employers.”
He says a recent study named Des Moines as one of eight midsize cities—and the only one not in the South—expected to have 50% growth over the next several years.
Millennials and boomers and more
Millennials and baby boomers both have the potential to dramatically affect the real estate market in different areas, according to Buckley. “As a buyer group, millennials are affected as much by rental prices as they are by home prices.” As rents have risen steadily over the past few years, it has motivated some millennials and other first-time buyers to consider home ownership.
“As much as we focus on first-time buyers, there’s a very large market in Iowa for those downsizing who don’t want to sacrifice quality in exchange for less square footage.” Baby boomers put great value on amenities, he notes, and are able to afford a higher level of quality. “Builders who address this demand—who can meet the price point and quality expectations these buyers are looking for—will find a growing market.”
Robert Burns
President, Coldwell Banker Mid-America Group, Realtors
Changes in interest and politics
Like most real estate professionals, he doesn’t see the change in interest rates having a significant effect on the real estate market for 2017. “An increase has been anticipated for so long that most predictions for sales numbers have already taken that into consideration.”
And politics aside, Burns believes the presidential change will be favorable to the market.
The months of discussion and debate about the presidential race have been reflected in the fluctuating market during the last part of 2016, he notes. “Any time you remove uncertainty, that’s a positive thing for the economy.”
Pricing and lot availability
Unlike previous years, 2017 should not see a notable shortage of buildable lots, according to Burns. “The lot availability situation has corrected itself to a great degree, so we’re not facing the same shortage we have in the past.”
He says that other factors will continue to play a part in the price of homes and inventory availability. “Economics are what they are. And with the shortage of skilled labor, the timeliness of construction projects can become a factor.”
Inventory levels
November of 2016 saw the supply of available homes rise slightly in Des Moines. “Typically a four- to five-month supply is low, and even with the November increase, we’re still just under four months. So it’s a seller’s market now and will probably stay that way for 2017.”
Adds Burns, “We’re on par to maintain that pace for the next year. I anticipate inventory levels to continue steadily growing.”
Millennials and boomers and more
He says millennials and boomers are both having an effect on the market, but the market has been slow to respond to their specific needs. “Millennials generally have more income than most first-time home buyers, but they’ve been focusing on paying down debt.”
He says experts in the housing market anticipated millennials would buy in greater numbers than they have so far.
“There were signs of correction at the end of 2016,” he adds, “as the years of low interest rates motivated more millennials to buy. And I expect that to continue over the next year.”
As that market grows, so does the baby boomer market.“There’s definitely a trend with the baby boomer buyers, and builders are recognizing the unique features these buyers want in a home. You’ll see more builders designing homes with single-level living, zero-elevation, and similar features.”
Burns says supply has a way to go to catch up to the demand, but he expects supply to grow in 2017.
Ken Clark
President, VIA Group, Realtors
Changes in interest and politics
“The change in interest rate will definitely have an effect. The days of 3% interest rates are gone for a while. But I don’t think we’ll hit 5% in 2017.”
He says the increased interest rate will probably only have a short-term effect on sales.
“Typically people hesitate for a little bit when rates go up, so things may slow briefly. But I don’t anticipate the rate change will have a dramatic effect on sales.”
In fact, Clark says some of those national statistics fail to take markets like central Iowa into account. “For example, the Shiller Index only calculates statistics from the 20 largest markets in the country,” he explains, “and those aren’t necessarily typical of the rest of the United States”
Pricing and lot availability
“If inventory levels remain low, it will stay a seller’s market. Winter always affects sales since people have a tendency to wait out the cold, so we’ll see inventory levels change in the spring like they always do.”
He says the unusually warm November and December helped boost home sales at the end of 2016, with more than 20% improvement over the year before.
Even so, Clark says the limited lot availability will continue. “I would expect the lot situation to stay below demand at least until 2020. The time it takes to get a development on the market is years, not months, so the economic downturn has put developers behind the eight ball.”
Inventory levels
“I actually expected inventory to increase more dramatically last year, so I’m hesitant to make that prediction again.”
Still, he does not see a significant increase in inventory level. “We’re moving toward somewhat balanced levels, weak but more balanced. Sellers had been a factor in the low inventory situation in 2016, which I hadn’t anticipated.”
He says many sellers hesitated to list their homes for fear they might not get their asking price. As the market has improved, more homeowners are listing their properties.
Millennials and boomers and more
“Millennials are having an effect in specific areas, like downtown, in both rentals and sales,” he believes. Clark predicts that potential buyers in the first-time, single-family market will have to act quickly because of the limited properties available.
He sees the baby boomer market remaining strong. “Buyers at this end of the spectrum are spending more time in their homes, more time as home owners. Their health is good. They’re more independent than previous generations. So they remain a viable market.”
John Dunn
President 2016, Des Moines Area Association of REALTORS®
Changes in interest and politics
“We intuitively think a rise in interest rates is a negative thing, but rates have been historically low, and a hike isn’t necessarily an indicator that the housing market is going to slow.”
Better indicators are the unemployment rate and the availability of good jobs. “We have an unemployment rate below 3% and great jobs. Our economy is healthy, so I don’t expect the interest rate change to affect home sales.”
Pricing and lot availability
He echoes the consensus from other professionals when it comes to home prices and lot availability. “The cost to develop land makes it difficult to keep enough inventory to satisfy the first-time buyer market overall.”
Because of the rising cost of land and added costs from regulation, he predicts more builders will focus on multifamily construction to meet the demand of buyers in the $170,000 to $250,000 range.
He adds that the emphasis on new construction at higher price levels has brought more resale properties on the market over the last year, though.
“More sellers listing homes between $150,000–$250,000 helped meet the demand for millennials and first-time buyers,” he says.
With continued low interest rates, that trend should continue in 2017.
Inventory levels
“We like to see inventory levels over 4,000 units, and it’s been below that for a while.”
With the improvement in other factors during 2016, he anticipates inventory levels to gradually but steadily increase during 2017, although he says it will probably remain a seller’s market.
“Even though the cost to build has gone up, the job market has been steady and rising,” Dunn says, “so builders are more optimistic about the market, and I anticipate inventory levels will continue to rise as a result.”
Millennials and boomers and more
Dunn says the millennial market has not been growing as quickly as predicted, in part because of the level of student loan debt most millennials are carrying.
“A lot of millennials have delayed purchasing homes by as much as five years because of their student loan debt. With the increase in interest rates, I hope we see the federal government also get involved in easing the guidelines for young and first-time buyers to qualify for financing.”
He adds that the Des Moines-area market is solid, especially compared to some larger markets, because our economy is more stable and the number of builders has kept competition healthy. “We have less speculative building, a steady and rising job market, and home prices that average just under $200,000.”
Don Godwin
Broker/Owner, RE/MAX Real Estate Group
Changes in interest and politics
“In my experience, a slight change in interest rates is more likely to spur people to act rather than the opposite. The 40-year average interest rate is 6%, and even with the anticipated rate changes, we have a way to go before we hit that.”
He adds that potential buyers who were waiting and watching the rate situation will often be motivated to buy now before rates increase further.
Pricing and lot availability
Unlike in previous years, Godwin says the availability of developed lots seems closer to market demand. “Entry-level lots are still pretty difficult to find. It’s hard to build new homes at entry-level prices when lots typically start at $70,000.”
He says there are pockets of buildable lots within metro communities that can help fill this demand, but those lots are very limited. “You see occasional in-fill properties come on the market, which are typically lower price than those in new developments. But that type of lot isn’t available in significant numbers to meet the first-time buyer market in general.”
Some developers have begun focusing on this market, he adds, but first-time buyers will find more success in the resale market.
Inventory levels
“A healthy real estate market has inventory levels of about six months. And we’ve been at about a three-month supply over the last twelve months or so, but that’s going up.”
One factor he says has helped keep properties moving is the DIY and rehab trend.
“Homeowners who are willing to rehab or spruce up a property before putting it on the market get much faster results. So many buyers fail to see the potential in a home if it needs updating or has outdated paint or carpeting. For a few thousand dollars, a home can look completely different and sells so much faster.”
Godwin adds that 95% of buyers can’t visualize how those small changes will transform a house, so it’s to the seller’s advantage to make those changes prior to listing.
Millennials and boomers and more
“There’s no doubt the millennial market is there, but with the shortage of new homes at a price first-time buyers can afford, more millennials are focusing on the resale and rehab market instead.”
At the other end of the spectrum, Godwin sees less growth potential. “That end of the market for executive homes may be a little overbuilt right now. My Realtors who specialize in executive homes are struggling to find buyers.”
He sees the resale market remaining strong in 2017 and the new construction market for move-up buyers continuing to grow.