The estimate from the Bureau of Economic
Analysis (BEA) of sharply improved economic growth in the second quarter is
good news for the housing market Freddie Mac's lead economists said today. The advance BEA report puts GDP growth at 4.0
percent in the second quarter compared to -2.1 percent in the first while Freddie
Mac forecasts continued improvement in economic growth with an average of 3.3
percent in 2015 and a continued decline in unemployment.
Chief Economist Frank E. Nothaft and Deputy
Chief Leonard Kiefer see household formations picking up and projects housing
starts will increase 28 percent over the 2014 rate to 1.3 million units in
2015. Long-term interest rates will
likely move up with 30-year fixed-rate mortgages at about 5 percent by the end
of next year.
The economists say one concern is the
underperformance of the single-family housing markets over the last several
years. The single-family markets slowed
after rates began to increase in mid-2013 and while both housing starts and
sales moved higher in the second quarter of 2014 this shows at best they say
that the housing market is very fragile.
The path forward is for a housing market
driven by fundamentals. Nothaft and
Kiefer say jobs are a fundamental driver and with the employment sector picking
up steam, more and better jobs should lead to greater housing demand. The strongest housing markets today are those
with the strongest labor statistics. As
the labor market expands it will stimulate housing by driving household
formations and housing demands in more markets.
Household formation however is still a
concern. Tdoubling up he Census Bureau reported net
household formations over the last four quarters of 458,000 where long-term
projections expect 1.2 to 1.3 million a year.
This slow formation has led to and a rise in the number of
persons per household - from 2.69 persons in 2005 to 2.76 persons, an increase
of 2.6 percent. If the persons per
household had held steady over that period there would be 3 million more
Those 3 million "missing" households
will probably show up over the next few years, especially if the labor market
continues to improve, but we don't know if the single-family housing market
will be the beneficiary. The Census Bureau also reported that over the last
four quarters while the number of homeowners was essentially unchanged the number
of renter households increased by 458,000. Maybe the new households all want to
become renters. Historically we know
that most will at least start out that way.
Rental market vacancy rates are at the lowest
levels in over 14 years. And while aggregate vacancy rates for single-family properties
remain elevated there are tight for-sale inventories in many parts of the
country. Over time, the majority of those
additional renter households will likely transition to homeownership. Millennials
as a whole have formed households and married at older ages than prior cohorts,
and will likely transition to homeownership at an older age as well.
And when they decide to become
homeowners, will they be able to afford to do so? Right now the answer is yes as homebuyer
affordability remains strong in most parts of the country. Stronger economic growth and job creation
will also boost family incomes and a 5 percent increase in income increases
homebuyer affordability by 12 percent.
Even as a stronger economy, more
household formations, and increased rental demands puts upward pressure on
single family house prices and rents, the ratio of mortgage payment to rent
ratio for the U.S. which is about the lowest it has been in more than 35 years will
remain relatively low. One big change
for families who want to transition to homeownership is amassing the funds for
a down payment and closing costs. A
stronger economy should allow household savings to grow.
Affordability is also sensitive to
interest rates and Freddie Mac expects that they will increase only slowly over
the next 16 months as the Federal Reserve indicates they will continue their
accommodative policy until the labor market fully improves.