Economic Outlook going from Gloom to Bloom

Freddie Macs senior economists Frank E. Nothaftrnand Leonard Kiefer saidrnin the company’s March Outlook that “the continued strengthening of the economyrnhas brought good news for housing and mortgage markets so far this year” withrnnonfarm payrolls increasing by 236,000 in February and the unemployment raterndropping to 7.7 percent from 7.9 percent. rnWhile the unemployment rate remains well above what would be expected inrna healthy economy, it’s moving in the right direction.</p

Near record-low mortgage rates are contributing to near record-high homebuyer affordability and housing is increasinglyrncontributing to an economic recoveryrn”that is poised to turn this year’s spring homebuying season from gloom tornbloom.”  </p

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According to the Flow of Funds Accounts from the Federal Reserve, household andrnnon-profit totalrnassetsrnincreased by 7.4 percent in 2012, with the value of owner-occupied realrnestate, including vacant land and mobile homes, increasing by 8.7 percent. In 2009 real estate lost $1.1 trillion in value, largely due to the fall inrnhousernprices. Inrn2012, it added $1.5 trillion to household and nonprofitrnbalance sheets, while financial assets added $3.8 trillion. On the liability side, outstanding residential mortgage debt increasedrnfor the first time since 2008, indicating that household deleveraging might berndrawing to a close.</p

Nationally house prices were up by 6.4 percent on an annual basis in December according tornthernFreddie Mac House Price Index (FMHPI). rnThe housing markets hardest hit by the Great Recession such as Arizona posted the strongest gains. Freddie Mac points out that while the price increasesrnare significant, theyrnare off a deep bottom and in some markets prices evenrnovershot the bottom. </p

Freddie Mac expects to see the positivernhousing market momentumrnto carry over intorn2013 with continued low mortgage rates, increasing house prices, and gradually improving consumer confidence supporting increased homernsales.  The company projects sales to bernup 8 to 10 percent over 2012 and the demand for new housing (both multifamily and single-family)rnto result in more construction, higher new home salesrnand greaterrnconstruction employment. Housingrnstarts are projected to increase torn950,000 units for 2013, compared torn780,000 in 2012.</p

Nothaft and Kieferrnsee two potential stumbling blocks that could slow or reverse the building momentum in the economy and housing market. rnA deterioration of the situation in Europe couldrnweaken foreign demand and potentially disrupt financial markets. Domestically, fiscal policy could be a drag on economic growth. The Congressional Budget Office and othersrnexpect the Sequester to reduce economic growth by about 0.5 of a percentage point in 2013 and Freddie Mac reduced its projections inrnFebruary to reflect that number. That means the fiscal drag will just about offsetrnthernpositive contribution residential construction is poised to make to the GDP in economic growth.</p

Sequestration cuts will also likely result in lower employment growth, which should have a dampeningrneffect on housing. With modest growth and stubbornly high unemployment, long term interest rates,rnsuch as for the 30-year fixed-rate mortgage, will only gradually creep up and likely remainrnbelow 4 percent throughout 2013.</p

The economists see a brighter long-term outlook with economic growth inrn2014 of around 3.5 percent.  After absorbing the fiscal drag from the sequestration cuts, the unemployment rate should begin to come down in 2014, butrnwill not drop below 7 percent until 2015. If inflation remains contained and thernFederal Reserve continues on its stated course mortgage rates should remain low,rnandrnthis should continuernto help fuel the housing recovery.</p

“Regardless we are already beginning to see the housing wealth effect take hold in the broader market which should translate into the healthiest spring homebuying season we have seenrnsincern2007,” the economists say.

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