Mac's economists used this month's Economic and Housing Market Outlook to look
at three areas of supply and demand.
Analyzing each, they say, will help us understand the direction in which
we are moving and each is critical to keeping the housing recovery not just
going but growing. And in each of these
fundamental areas, mortgage rates, home sales, and household formations, what
we expect to be happening, isn't.
Nothaft, chief economist, and deputy chief Leonard Kiefer point out that over
the past five months the Federal Reserve has gradually tapered the growth of
its holdings of mortgage-backed securities (MBS) that it acquired through three
rounds of quantitative easing. For May
2014 the Fed planned to hold growth in its holdings to $20 billion, one-half of
what the monthly pace had been from the start of the third round (September
2012) through the end of 2013.
this curtailment, mortgage rates have largely held steady with fixed-rates even
dipping in early May to levels last seen in November. This happened because the Fed tapering has
coincided with a sharp reduction in mortgage originations and thus new MBS
issuances. In fact, the ratio of the Fed's
MBS acquisitions to new issuances is slightly higher than a year ago. In other words, the Fed's 'demand' for new MBS has declined less than has new 'supply'. This is one reason the primary market is currently
enjoying lower than expected mortgage rates. New MBS will continue to run below that of
last year because of the sharp decline in refinancing which is down from about
80 percent of the dollar volume of mortgages in January 2013 to 43 percent last
month and is expected to decline further.
Freddie Mac's economists expect to see the 30-year fixed-rate mortgage gradually rise to around 4.6 percent
by the end of the year as the Fed continues
to 'taper' and ultimately reduces its share of new MBS
Home sales are
also contrarian. Even as sales have declined, prices have continued to rise.
Many real estate agents are reporting
relatively low inventories of homes for sale and even with fewer of them
selling, the inventory remained at only a 5.2 month supply in March and when
new homes are included in the count, the total number of homes for sale
relative to the number of households in the U.S. has been running at the lowest
level in more than 30 years. This low
inventory reflects several features of the market. First, many homeowners are underwater and
reluctant to sell, especially since Congress has allowed the Mortgage
Forgiveness Debt Relief Act to expire making them libel for taxes on any
forgiven debt in a short sale. Second, the
majority of homeowners with a mortgage either bought or refinanced during the
last few years and have such low interest rates they may be reluctant to sell
and rebuy in a higher rate market. Third, while it varies by location, REO
sales have slowed considerably over the past couple of years.
in the number of homes offered for sale at each price point over the past year is consistent with the trend in the number of sales and in house prices: A supply-constrained market (holding other factors constant) will result in a decline
in the volume of sales and an increase
in real transaction prices (that is, house prices rising faster than inflation for all other goods).
Thus, even though existing home sales are down 6.3
percent during the first quarter
of 2014 compared with a year ago, house prices are up 8 percent in the Freddie Mac House
Price Index, and even more in
some other price
While housing starts are up substantially from their 2009 trough they
are still at depressed levels and one factor constraining new
construction has been the "lackluster" rate of household formations
which have averaged barely better 500,000 each year since the Great
Recession, half of the pace in the previous decade. Harvard's Joint
Center for Housing Studies is projecting an average of 1.2 to 1.3
million per year over the 2015 to 2025 decade. Household formations are
traditionally the largest driver of the demand for new housing; thus,
when demand is weak, net new supply will be reduced as well.
forces affect household formation, demographics and the business cycle. The demographic component is currently
favorable - the number of live births in the U.S. began to increase around 1990
and peaked in 2007 so a rising number of young households should be arriving in
the housing market. However the
protracted weak labor market has meant that many adults have continued to live
with relatives or have returned to school.
Many have also accrued considerable student debt in the process.
economists say that a pickup in household
formations will require stronger job
growth. "We understand that we might sound like a broken
record here, but the need to
have a job before buying a house is a simple fact of life." April's job report was encouraging, with 288,000 jobs added to the economy and Nothaft and Kiefer project economic growth accelerating to about a 3.0 percent annualized rate in the final three quarters
of 2014. "If we reach that level it should generate
between 200,000 and 250,000 jobs per month,
and with that an increase
in net household formations and new housing starts-or in other words,
additional housing supply. If we get that, we'll be able to address the underlying 'supply' problem because we know the 'demand' for housing is there.