Freddie Macs senior economists Frank E. Nothaft and Leonard Kiefer said in the company's March Outlook that "the continued strengthening of the economy has brought good news for housing and mortgage markets so far this year" with nonfarm payrolls increasing by 236,000 in February and the unemployment rate dropping to 7.7 percent from 7.9 percent. While the unemployment rate remains well above what would be expected in a healthy economy, it's moving in the right direction.
Near record-low mortgage rates are contributing to near record-high homebuyer affordability and housing is increasingly contributing to an economic recovery "that is poised to turn this year's spring homebuying season from gloom to bloom."
According to the Flow of Funds Accounts from the Federal Reserve, household and non-profit total assets increased by 7.4 percent in 2012, with the value of owner-occupied real estate, including vacant land and mobile homes, increasing by 8.7 percent. In 2009 real estate lost $1.1 trillion in value, largely due to the fall in house prices. In 2012, it added $1.5 trillion to household and nonprofit balance sheets, while financial assets added $3.8 trillion. On the liability side, outstanding residential mortgage debt increased for the first time since 2008, indicating that household deleveraging might be drawing to a close.
Nationally house prices were up by 6.4 percent on an annual basis in December according to the Freddie Mac House Price Index (FMHPI). The housing markets hardest hit by the Great Recession such as Arizona posted the strongest gains. Freddie Mac points out that while the price increases are significant, they are off a deep bottom and in some markets prices even overshot the bottom.
Freddie Mac expects to see the positive housing market momentum to carry over into 2013 with continued low mortgage rates, increasing house prices, and gradually improving consumer confidence supporting increased home sales. The company projects sales to be up 8 to 10 percent over 2012 and the demand for new housing (both multifamily and single-family) to result in more construction, higher new home sales and greater construction employment. Housing starts are projected to increase to 950,000 units for 2013, compared to 780,000 in 2012.
Nothaft and Kiefer see two potential stumbling blocks that could slow or reverse the building momentum in the economy and housing market. A deterioration of the situation in Europe could weaken foreign demand and potentially disrupt financial markets. Domestically, fiscal policy could be a drag on economic growth. The Congressional Budget Office and others expect the Sequester to reduce economic growth by about 0.5 of a percentage point in 2013 and Freddie Mac reduced its projections in February to reflect that number. That means the fiscal drag will just about offset the positive contribution residential construction is poised to make to the GDP in economic growth.
Sequestration cuts will also likely result in lower employment growth, which should have a dampening effect on housing. With modest growth and stubbornly high unemployment, long term interest rates, such as for the 30-year fixed-rate mortgage, will only gradually creep up and likely remain below 4 percent throughout 2013.
The economists see a brighter long-term outlook with economic growth in 2014 of around 3.5 percent. After absorbing the fiscal drag from the sequestration cuts, the unemployment rate should begin to come down in 2014, but will not drop below 7 percent until 2015. If inflation remains contained and the Federal Reserve continues on its stated course mortgage rates should remain low, and this should continue to help fuel the housing recovery.
"Regardless we are already beginning to see the housing wealth effect take hold in the broader market which should translate into the healthiest spring homebuying season we have seen since 2007," the economists say.