What Will Finally Rev Up The Housing Engine?

Posted by Patrick Barnard on May 19, 2014 No Comments
Categories : Required Reading

As the housing recovery readies to shift into higher gear during the spring home buying season, regular supply and demand forces continue to produce unexpected results, according to Freddie Mac's U.S. Economic and Housing Market Outlook for May.

Freddie Mac predicts new home construction to increase by 18% and house price appreciation to moderate to an annual growth of 5% this year. New and existing home sales will remain at 5.5 million – the same as last year – as the inventory of homes available for sale remains low in many markets.

Single-family originations are expected to drop about 35% in 2014 relative to 2013, based on the large decline in refinance volume. Refinance is expected to represent about 40% of this year's originations – down from about 60% in 2013.

While net household formation continues to increase, the overall level remains lower than what would be expected; stronger job and income growth are necessary to support additional household formation, says Freddie.

Additionally, it expects the 30-year fixed-rate mortgage to gradually rise higher, ending the year around 4.6%, and fixed rates to rise gradually during the second half of the year in part as a result of the Federal Reserve's tapering of net mortgage-backed securities acquisitions.

Frank Nothaft, Freddie Mac vice president and chief economist, says "the heart of the matter" of the housing recovery is job creation, which will get the "housing engine firing on all cylinders.’

He adds that while the job numbers for last month were strong, "nothing will solve the supply and demand factors faster than keeping employment growth going," and until this happens, Freddie Mac is revising down the forecast on an annualized basis in several areas.

‘While we still see an improving trajectory for the housing market, we're pushing it out a few months from our earlier forecast because we expect GDP growth to pick up in the final three quarters of the year from what was clearly a dismal first-quarter reading,’ Nothaft concludes.

Freddie Mac's complete report can be found here.

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