Using an Olympic theme of "Will Housing Take Gold", Freddie Mac's economists said today that, while they had expected housing 'to come out of the gate at a good clip at the start of 2014, bolstered by an improving economy," the labor market report for January instead showed a slow start for the residential sector with only 113,000 new jobs created, well below the 2013 average of 194,000 per month.  However the unemployment rate dipped, labor force participation edged up, and 48,000 of those new jobs were in construction and nearly half of those in the residential sector.  The economic analysis, prepared by Freddie Mac's Chief Economist Frank E. Nothaft and Deputy Chief Economist Leonard Kiefer was published Tuesday in the company's monthly Economic & Housing Market Outlook

The Federal Reserve seems committed to ratcheting down its acquisition of Treasuries and mortgage-backed securities (MBS) as long as growth remains at least at 2013 levels and also likely to taper down its extra purchases to zero by the end of the year which will put some upward pressure on long-term interest rates.  But the effect of Fed actions on MBS yields in the short term are likely to be mitigated by a recent decline in new issuances related to a seasonal slowdown of new purchase mortgages and a drop in refinancing because of higher interest rates. 

Also global capital market investors have shifted funds into Treasuries and other fixed-income assets out of concern over emerging market growth.  Even as the Fed began to taper at the beginning of the year 10-year Treasury yields and mixed rate mortgage rates generally have eased; down about 0.3 percentage points over January and early February.  This has resulted in an increase in mortgage application volume of 20 percent and applications for refinancing rising by 28 percent. 

This increase, the economists say, underscores that a significant amount of potential refinancing is out there.  Of the outstanding 30-year MBS for Fannie Mae, Freddie Mac, and Ginnie Mae, over $800 billion have a coupon of at least 5.0 percent.  Even after accounting for servicing and other fees many of the mortgages underlying these securities should have incentive to refinance, provided borrowers can qualify in the current credit environment.



Rising mortgage rates in the second half of 2013 "stunted" the housing recovery, and new homes sales fell by 7 percent in December.  Existing home sales reached a 2013 peak of 5.4 million annualized sales in August and have declined nearly 10 percent since then although some of the decline can be attributed to unusually bad winter weather in some areas.  Nothaft and Kiefer note that while total home sales are approaching the normal historical range, it is the composition of those sales, new versus existing, that is outside of the normal range.  "We expect overall home sales to rise about 5 percent in 2014 relative to last year, with about a 3 percent rise in existing home sales coupled with a 30 percent jump in new home sales," they say.  They also expect that the elevated rate of cash sales - about 30 percent of home purchases will decline with more new homes sales and a larger share of home sales will be financed with a mortgage in 2014.

They caution, however, that with rising rates it will be difficult for many families to purchase a home without some income growth. There has already been substantial erosion in homebuyer affordability over the past year, "therefore, jobs and income growth are necessary for 2014 to turn in another gold-medal performance for the housing recovery."