It looks like 2017 will be a transition year for the U.S. residential real estate market.

Stock Market. I’ll forecast that the stock market continues more or less sideways but ends the year a lot weaker than it starts. Talk of a coming recession increases.

Consumer. Employment and consumer spending continue strong in 2017 but before the end of the year unemployment stops falling. As consumer spending increases less, the economy increases less.

San Francisco. The number of home sales in metro San Francisco will fall although prices won’t fall as much as sales. Unless we have another tech boom or foreign buyer boom, San Francisco home prices will likely fall a lot more in 2018 than in 2017 as the unsold inventory of homes for sale builds up and price expectations fall.

Vancouver. The negative home sales and home price stories out of San Francisco will be eclipsed by drastic bubble stories out of Vancouver.

Price Expectations. I think the average person’s expectations of future home prices is based on what they FEEL happened to home prices over the last 3 years. They expect price increases (or decreases) in the next 3 years to be similar to the home price increases (or decreases) they FEEL happened over the last 3 years.

As vague feelings for home price increases from 2013 through 2015 are slowly replaced by vague feelings for home price increases from 2014 through 2016, and then 2015 through 2017, the average person in Vancouver and San Francisco will slowly, very slowly lower their estimates of future home price increases.

Those future price expectations are a big factor in determining how many people want to buy homes and how much they’re willing to pay. Price expectations are also a big factor in determining how many homeowners want to sell their homes and how much they’re willing to accept.

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Contagion. The bubble stories out of Vancouver and San Francisco will likely impact price expectations in other West Coast markets, particularly in the weaker secondary markets. I think the impact will be small in 2017 but larger in 2018.

It depends, of course, on what actually ends up happening in Vancouver and San Francisco but also on the number and tone of the news stories. A lot of scare stories would have a bigger impact on West Coast price expectations than fewer, clinical stories.

Non-West Coast. Most of the rest of the rest of the United States housing markets should have a fine year but not as good as 2016.

Interest Rates. I’ve been terrible at forecasting interest rates but what the heck, I’ll forecast that mortgage rates in 2017 will be higher than in 2016.

Recession. Recessions happen. About every 7 to 10 years. It’s been 9 years since the Great Recession started. The recovery from the Great Recession was unusually slow so maybe that means the recovery will also be unusually long.

But then again, we’re already in year 9, so even if it does go long, we’re likely to see a recession start in the next 2 or 3 years.

If the overall economy were to slow down, that would trigger a cascade in home prices in overpriced markets.

Recessions and overpriced housing markets are a terrible combination. For example, home sales peaked in 2005 and home prices peaked in 2006 but home prices didn’t really start to tank until 2008 after the Great Recession started.

My Downside Bias. Just so you know, my forecasts have erred on the downside in recent years. I’ve been forecasting average home price increases for years but they’ve come in at above average. But to be fair, it seems most economists have forecast “normal” years but the numbers have come in higher than normal.

2017 Forecast. Most economists are forecasting home prices to increase nationally from 3% to 5% in 2017, which would be a normal year. I agree with that. Yes, I’m forecasting a normal year again like most economists.

I just want to add something that others aren’t saying. I think the top stories in 2017 won’t all be about how fast home prices are increasing in San Francisco, Seattle, Portland, Denver, Dallas or wherever.

San Francisco will probably be the top U.S. real estate story 2017 but this time because of falling prices.

For 2017, I’m forecasting a transition year.

I think 2017 will be an average year in most places.

The real question marks for me are 2018 and 2019. Do we get a recession and how hard would a recession hit home prices?