Originally written by: Joe Melendez , November 23, 2016

At this time last year, I predicted 2016 would be a good year to buy a home. It appears millions of Americans agreed with me. Total home sales were up 5% in the first half of 2016, and the total annual growth is expected to cap off at 4.7%. Most encouraging is the record 34% first-time homebuyers in Q3 2016, up from 29% in 2015.

For 2017, I predict a softening led by the imminent rates hikes – Fed supported or not. But there still could be opportunities for buyers and sellers alike.

1. Price correction, particularly in overheated markets

As interest rates gradually edge up, naturally we will see buyers retreat. Some homeowners with HELOCs will see significant increases in their payments and may be forced to sell – many not afforded the patience to wait for a top offer. We saw some dramatic heating up recently in markets like Denver, Seattle, Portland, Austin and many parts of California where wages cannot keep up with fast-rising home prices. Instead of meeting the record asking prices, some buyers in these areas are looking for deals in the city outskirts.

What’s interesting to me is to see that even when Fed-led rate hikes have not kicked in, an impending correction was starting to get baked in. In our own quarterly Modern Homebuyer Survey, 63% of all homeowners and 8 in 10 Millennial homeowners think the current home prices are inflated and a bubble is looming. There are indications some homeowners are hesitant to sell their current home because they don’t want to pay inflated prices for their next home, then watch prices drop shortly after they buy.

2. Lower housing inventory

One of the biggest housing stories of 2016 was low inventory, down near double digits (– 9.7% for mid-tier and -8.9% for entry level homes). It will take some time for new home construction to close the demand gap. Home refinancing is forecasted to be down 41% in 2017 after a banner year and homeowners tend to stay put for at least a couple years after they refinance, which will keep resale inventory down. But of course, people still have to live their life; everyday people move for jobs or for personal reasons, some even after they refinanced. If you have a desirable home to sell at the right price, you could do very well with less competition in 2017.

3. Higher housing demand among Millennials

While there was never any doubt the largest generation ever would be a driving force in other product categories, many experts didn’t know if Millennials would eventually embrace homeownership or remain lifelong renters, especially given their mobile lifestyle and job tenures. Our latest research indicates Millennials do have a strong desire to own home, and they are planning to spend big. 4 out of 10 Millennials who plan to buy soon plan to spend $500,000+ on their next home. Now, part of this could be wishful thinking, but Millennials are earning higher wages, and more are moving to top urban areas where home prices are higher. These are all positive trends for the housing market. Affordability is still a top concern, with 62% not confident they can afford a down payment. I expect to see more Millennials take advantage of low down payment mortgages, as they become informed about these new programs.

4. Boomerang homebuyers

It was nine years ago at the height of the housing crisis when millions of Americans filed for foreclosure, bankruptcy and watched their credit severely tarnished. After the seven-year black-mark period, it is estimated 2.5 million former homeowners with delinquent payment history could return to the market in 2017 with near prime credit, eligible for a new mortgage. I predict this group of low-hanging fruit potential buyers fundamentally believe in the virtues of homeownership, however, given their negative experiences and long road back to financial health, they will likely be a highly cautious buyer. I urge the realtor and seller communities to focus on a strong reassurance message when working with this unique and sizeable market.

5. The Trump era

We can’t offer housing predictions for 2017 without addressing the elephant in the room. There were widespread apocalyptic market warnings for a potential Trump win, which now appear to be mostly hype. Equity investors pushed the market higher as they expected increased defense and infrastructure spending, potentially higher wages, a pro-bank administration, which should all bode well for housing. However, the election result did trigger a sell-off in the bond markets, pushing mortgage rates higher past the psychological barrier of 4% for a 30-years fixed mortgage in less than one week.

6. Bonus: A new era for housing professionals

Finally, as we enter a new presidential era, there are other factors I believe will make 2017 a notable year for housing. Many market assumptions we operated on in much of 2015 and 2016 will change in 2017:

• Interest rates will not stay at historically low levels;
• We will likely see inflation creep higher;
• Focus will shift from refis (leaving an estimated $400B+ hole) to new purchase homes;
• Upgrade homebuyers – many of whom have recently refinanced and planned to stay put – will decrease;
• Millennials will start buying amid skyrocketing rents, bringing with them reserved fiscal attitudes, self-reliance, and prolific use of digital and social platforms to buy homes.

All these translate to a crucial need for a paradigm reset and innovation among housing professionals. 2017 could be a wild ride, but one thing I do feel certain about is that those who are most adaptive to change and innovation – those wanting to move beyond points, rates and the typical upgrade offers – will succeed in 2017.

The “easier” buyers moved in 2016, but there are plenty more ready to make the jump. We just need to hunker down, focus and really address buyers’ needs in order to continue our progress in helping restore the American Dream for everyone.