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June 30, 2016

Improving Economy Helps Buoy Housing

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Improving Economy Helps Buoy Housing

Recent drops in oil prices and mortgage rates, along with positive tailwinds in the economy, are helping to jump-start the housing market in the new year, according to Freddie Mac’s newly released 2015 U.S. Economic and Housing Market Outlook for January. Consumers are gaining confidence, which is expected to translate to higher home sales in the coming months. Some economists are skeptical on whether this latest jolt will stick around for the entire year, however.

NAR Forecast: Home Sales Only Going Up From Here

Freddie Mac economists note that mortgage rates continue to remain well below expectations, and they predict that mortgage rates will remain low at the beginning of 2015, staying around 4 percent for the first two quarters of the year at least. Last week, mortgage rates dipped to a 20-month low with the 30-year fixed-rate mortgage rate plunging to a 3.66 percent national average and the 15-year fixed-rate mortgage dropping to 2.98 percent. 

“We … expect these low mortgage rates to help the growing purchase market continue to expand and reach the highest levels we’ve seen since 2007,” the economists note in the forecast.

But rates likely will move up by the end of the year. Lawrence Yun, chief economist for the National Association of REALTORS®, says that the 30-year fixed-rate mortgage could average around 5 percent – or higher – by the end of this year.

"I would not be surprised if it is above 5 percent because when mortgage rates move or interest rates move, it is generally not in a slow creep," Yun told Bankrate.com.

That said, many potential home buyers remain sidelined due to high monthly rents that have prevented many from being able to save for a down payment on a home. Freddie Mac believes its new announcement, along with Fannie Mae, of offering mortgages with down payments as little as 3 percent, along with the Federal Housing Administration’s recent announcement that it will cut its premiums for new and refinancing borrowers by a half percentage point to help increase mortgage availability to first-time home buyers.

Economists also note in Freddie Mac’s report that home prices will likely rise by 3.5 percent this year. In addition, in the labor market, wages are expected to rise, helping to give consumers greater confidence. The National Federation’s Independent Business Index for December showed that small businesses expect to raise employee compensation to the highest level since 2006.

Still, economists worry that some of the positives in the housing market may be for a “limited time only,” influeneced by unexpected weaknesses in the global economy as well as what the Federal Reserve ultimately does with mortgage rates. While mortgage rates are expected to largely remain low for the next two quarters, many economists are expecting rates to move higher in the second half of the year.

"On balance there are a lot of positive opportunities in the U.S. economy at the start of the year, and the real question is whether or not households and businesses will be able to seize these opportunities and make the most of them,” says Frank Nothaft, Freddie Mac’s chief economist. “The reprieve in interest rates and drop in gas prices should help to spur economic growth. Until rates start to rise later in the year, housing markets should respond positively, and we anticipate increases in home sales and continued improvement in construction activity.”

Source: “January U.S. Economic & Housing Market Outlook,” Freddie Mac (January 2015) and “Housing Market’s ‘Interesting Times,’” Bankrate.com (Jan. 19, 2015)