Freddie Mac is dismissing concerns of some analysts that the
change in the Federal Reserve's monetary policy may bode ill for the housing
industry. The company's vice president
and chief economist Sean Becketti welcomed the New Year with an upbeat rebuttal
of those concerns on Freddie Mac's Executive Perspectives blog.
Becketti said that he does not share the worries about the
December hike in the fed funds interest rates boosting mortgage rates, reducing
home affordability, or reversing the recent improvements in housing numbers. He cites several reasons for his view.
The Federal Reserve is aware that the economic recovery
remains fragile and has committed to a policy of gradual monetary
tightening. They should be taken at
their word, Becketti says, and we should expect only a few modest increases in
short-term rates this year.
Further, the connection between short-term rates controlled
by the Fed and long-term rates including those for mortgages is "tenuous." He cites the example of the 17 consecutive
monthly rate hikes made by the Fed in the mid-2000s. They had virtually no effect on mortgages
rates which remained around 6 percent.
The weak global economy will continue
to attract money to Treasury securities from around the world, limiting
longer-term interest rates while the strong dollar and falling oil prices will hold
U.S. inflation down. This will provide
further incentives for the Fed to only gradually and cautiously increase
Becketti does see long-term rates
beginning to move up this year as monetary tightening starts to impact economic
activity but those rates will move only fractionally compared to short-term
rates. However, he says, even a modest
increase in mortgage rates will cut home affordability, especially for
first-time and low-to-moderate income homebuyers and this may restrain house
price increases at the lower-priced end of the market.
This could change should the Fed begin
to reduce the size of its mortgage-backed securities (MBS) portfolio obtained
through the various quantitative easing (QE) programs. This could drive long
term rates up sharply but the concept is at odds with the Fed's public
commitment to gradual easing. "We don't
expect the Fed to shrink the QE portfolio until the latter part of 2016 at the
earliest, and any significant reduction in the QE portfolio isn't likely until
2017," he says.
Becketti's optimism about the impact of
Fed actions on housing does not extend to the economy as a whole. The Fed seems to believe the healing of the
country's macro economy is on track but he sees its performance since the
recession as by far the weakest since the post-World War II era and
productivity appears to have declined to the point that there will be only 2 to
2.5 percent real growth.
Summing up his housing predictions for
2016, he sees mortgage rates increasing only gradually from year end 2015's 4.1
percent to an average of 4.4 percent this year. While short inventories will
continue to boost home prices, gains will moderate, partially in response to
the reduction in affordability, to around 4.4 percent this year.
Home sales will continue to improve, up
by about 3 percent in 2016 but home construction will do even better with housing
starts rising by 16 percent. While
single-family homes will account for most of the increase rental apartment
construction will grow as well - although not enough to meet the growing demand
coming from both older and younger age groups.
Despite an increase in home purchases,
mortgage originations will decline along with the volume of refinancing. He is looking for about $1.58 trillion in
origination volume compared to the projected $1.75 trillion in 2015. That year-end projection has been revised
upward largely due to higher-than-expected refinance activity which even after
years of sustained low interest rates, has remained high. Becketti says the
volume of refinances may continue to exceed expectations despite mortgage rate
increases, especially if the share of cash-out refinances continues to grow.