Freddie Mac calls "Taper Talk" is the main topic of conversation in the financial world, that is, speculation about the timing and speed that the Federal Reserve will employ as they scale back their policy of quantitative easing. " This speculation has prompted the recent roller coaster in interest rates and a ride where the exit will be at a higher rate level than the entrance," the company's chief economist Frank E. Nothaft and deputy chief Leonard Kiefer say in the current issue of Outlook.

Echoing similar analysis from Fannie Mae out this morning, Freddie says that while higher interest rates on mortgages will slow the housing recovery, they are unlikely to stop it in its tracks. In the first half of this year the economy added 1.2 million net jobs, the best pickup in nonfarm payrolls for a similar period since 2005. More than 100,000 construction jobs were added due to a spike in housing starts and the increase in employment will mean more Americans will have the resources to form separate households and further bolster housing demands. Nothaft and Kiefer say they expect this pace in job growth to continue in the second half, making 2013 the best year for growth since 2005.

They don't, however, expect the rapid pace of home price appreciation to continue at the double digits annual increases of recent months. Seasonally adjusted values were up about 5 percent in just the first half of 2013 but will likely moderate to 3 to 4 percent in the second half for an annual gain of 8 to 9 percent for the year and then settle in around 3 percent in subsequent years. When adjusted for a 2 to 2.5 percent inflation rate this will make real appreciation about 0.5 to 1 percent per year, about in line with historic numbers.

Sales likewise have increased dramatically, up over 10 percent in the first five months of this year compared to the same period in 2012 and new home sales are up 29 percent. The volume of new home sales have led to a 24 percent increase in single-family housing starts and the above referenced new construction jobs. And likewise the Freddie Mac economists do not anticipate this surge will continue. They anticipate sales of new and existing homes to add an additional 2 percent this year and to rise 12 percent relative to the first half of the year.



The recovery in the multifamily market may have peaked with values recovering earlier and faster than house prices. Vacancies in professionally managed buildings are low and rents are expected to grow faster than inflation this year. Absorption rates for new units was 65 percent in the first quarter of 2013.



Mortgage rates have received much recent attention with the 30-year fixed-rate mortgage up a full point in the first five months. Much of the increase was due to "Taper Talk," which led to increased rates first because market participants anticipate that Fed tapering will increase interest rates in the near future, and second, they see the Fed taper talk as being indicative of a strengthening economy. "The real question is not what effect rising mortgage rates will have on the housing recovery - there's sure to be an impact - but will it be enough to stall the recovery? We don't think so," the two economists say. "Demand is strong, supply is limited, and for most families in most markets, housing affordability is still strong. But we do expect a substantial change in single-family originations as we transition from a refinance-dominated market to a much smaller purchase-money market by year-end."