Sentiment measures have improved to multi-year highs heading into next year, but 2017 is expected to deliver another year of pedestrian growth, according to the Fannie Mae Economic & Strategic Research Group's December 2016 Economic and Housing Outlook. Long-term interest rates continue to trend higher following the U.S. election and the December Federal Open Market Committee meeting, which revealed members' more aggressive fed funds rate projections. As a result, mortgage rates increased to more than two-year highs, creating headwinds for housing. Meanwhile, home price appreciation remains strong, and bullish investors have helped push equity prices higher, buoying household net worth and providing support to consumers. In addition, rising oil prices helped reduce drags on the energy sector. Despite these positive developments, policy uncertainty motivates ESR's projection of 1.8 percent growth in 2017, which would be the third straight year of such modest growth.

"The tenor of our forecast effectively remains unchanged: signs of cautious consumers this quarter, rising interest rates, the renewed increase in the U.S. dollar to a 14-year high, and heightened uncertainty in the political sphere suggest conservatism in our outlook," said Fannie Mae Chief Economist Doug Duncan. "While we are encouraged that confidence is rising across investors, consumers, businesses, economists, and homebuilders, much of it appears to be in anticipation that the forthcoming Administration and the new Congress will enact fiscal policies and deregulation that will help spur growth. While we believe that some pro-growth policies could be adopted next year, it would take time for them to benefit the economy, barring any offsetting initiatives such as more restrictive trade policies."

"The recent surge in interest rates amid continued strong home price appreciation are likely to present affordability challenges to home buyers, especially for young adults who are looking to enter the housing market for the first time," added Duncan. "However, stronger economic growth, if it materializes, should help support incomes, affordability, and the ongoing housing recovery."