Freddie Mac issued its monthly "outlook" for the month of July as well as a
round-up of the first half of 2006. While
the report still projects a housing market that is undergoing a "moderate and
orderly cooling," a comparison to the January outlook shows a slight decline
Freddie harkened back to one year ago to the first quarter of 2005 when home
values were growing at a rate of 15.4 percent, home sales that quarter
hit a record of 8.48 million (annualized) in the quarter, and 30-year fixed
mortgages, while on the rise, still averaged 5.7 percent. "A year later, the
second quarter numbers for 2006 are more moderate as expected. The summer of
2005 signaled a turning point in housing activity" from a "metaphoric heat wave"
to a more reasonable pace.
Noting that the economy is sending and receiving mixed signals that are creating
uncertainty for everyone, the report projects that the rapid growth seen in
the first quarter of 2006 will be replaced by slower GDP growth at a rate of
2.8 percent in the second quarter and an average of 3.5 for the year. This is
a downward revision
from the May report. Inflation, however,
appears to be on the rise. The Consumer Price Index (CPI) which grew at a rate
of 2.2 percent for all of 2005 reached an annualized level of 3.1 percent during
the first five months of 2006, largely driven, of course, by oil prices. The
Institute for Supply Management reported "tepid" growth in the manufacturing
and service sectors last month which signals economic weakness.
In the second half of the year markets, businesses, and consumers will have
to adjust to slower growth as an economy that has previously been largely driven
by the housing sector moves into slower growth because of rising energy prices
and a cooling housing market.
Freddy expects mortgage rates to continue to bounce around
"gently" as they have been doing and to reach an average of 6.8 percent for
the year by its end.
Due to increasing house prices and higher interest rates, housing starts will
fall to 1.92 million units this year. This is a 7 percent decline from 2005
and it is expected that starts will fall another 9 percent in 2007. Home sales,
both new and existing, will also drop 7 percent this year for a total of 6.96
million units. This, however, will still be the third strongest year in history.
Freddie Mac expects a further decline of 7 percent in 2007.
Because of the expected decline in the GDP, the report foresees an even slower
appreciation in home values than projected earlier. Values are now
expected to rise 7 percent this year; this is a .05 percent lower than the May
estimates (reflecting an unexpected rise in the first quarter) but consistent
with projections at the first of the year.
In spite of the continuing Federal Reserve rate increases and rising energy
prices, the predictions that Freddie Mac made in its January outlook are holding
up pretty well, although the housing market is clearly slowing. Some selected
projections from the January and the new July report are given below.
|30-Year Fixed Mortgage Rates
|1-Year Treasury Indexed ARM
|1-4 Family Mortgage Originations (millions)
|ARM Share of Mortgage Originations
|Refinancing Share of Mortgage Originations
|Growth of Residential Mortgage Debt
|Housing Starts (millions)
|Total Home Sales (millions)
|House Price Appreciation
The projections that have been revised upwards generally have to do with mortgages.
The substantial upward revision in refinancing, mortgage originations, and overall
mortgage debt may be due to a combination of continued cash-out refinancing
as the country's individual debt load continues to grow and homeowners bailing
out of adjustable rate mortgages as interest rates continue to climb.
The next Freddie Mac outlook will be published on August 8.