Freddie Mac: Clearer Path Ahead for Housing

After half a year of failed predictions and slow starts, the U.S. economy actually appears to be closing in on normal, at least according to Freddie Mac.

Freddie's latest Economic and Housing Market Outlook shows that the agency expects to see the U.S. housing market driven once again by fundamentals—jobs, household formations, and affordability—rather than economic upheaval.

Freddie is basing its optimism on a recent report from the Bureau of Economic Analysis that shows that the GDP grew at a rate of 4.0 percent in the second quarter, leading economists at the company to calculate that the economy will grow an average of 3.3 percent in 2015.

Household formations should increase, too. The Census Bureau reported that over the past four quarters, net household formations totaled only 458,000, and not the 1.2 to 1.3 million per year predicted by the Joint Center for Housing Studies at Harvard.

According to Freddie, slow household formation has resulted in a rise in the number of persons per household—which has increased by 2.6 percent since 2005, to 2.76 persons per household, on average. If persons-per-household had held steady at over that period, there would be an additional 3 million households today, the report states.

Nevertheless, Freddie expects household formations to pick up, and for housing starts to increase 28 percent (to 1.3 million starts) in 2015. If this happens, the report states, long-term interest rates will likely creep up, with 30-year fixed-rate mortgages reaching about 5 percent at the end of 2015. A recovering housing sector will sustain the rally in homebuilding despite likely increases in long-term interest rates, according to Freddie.

The biggest source of optimism for Freddie is the U.S. labor market. After several years of sluggishness, the U.S. has added 230,000 net new jobs on average for the first seven months of this year, Freddie reported.

"The economic growth and labor market gains we saw in the second quarter of this year are projected to continue, strengthening household formations and the housing sector," said Frank Nothaft, VP and chief economist.

Nothaft also expects construction activity to further accelerate the labor markets and, thereby, fuel even more household formations and more housing demand. The result, he said, is an economy that is gradually heading back to the black.