Freddie Mac Forecasts Future of Housing Growth

Add ""Freddie Mac"":http://www.freddiemac.com/ to the list of companies forecasting great things in the 2013 housing market. Economists took the opportunity to peer into the future in the GSE's most recent ""_U.S. Economic & Housing Market Outlook_"":http://www.freddiemac.com/news/finance/docs/Dec_2012_public_outlook.pdf.

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Predictions for 2013 are a lot different from those made for 2012, owing greatly to this year's better-than-expected gains in home prices, sales, and mortgage originations.

""The last few months have brought a spate of favorable news on the U.S. housing market: construction up, more home sales, and home value growth turning positive. This has been a big change from a year ago, when some analysts worried that the looming 'shadow inventory' would keep the housing sector mired in an economic depression,"" said Frank Nothaft, chief economist for Freddie Mac.

Nothaft noted that while the number of loans seriously delinquent or in foreclosure has weighed heavily on the market, this year's decline in both delinquent loans and distressed sales has mitigated their negative effects. Now, ""the housing market is healing, is contributing positively to GDP and is returning to its traditional role of supporting the economic recovery,"" Nothaft said.

As for 2013, home prices are expected to post continued gains throughout the year, though they aren't expected to be as dramatic as this year's increases. Nothaft expects most national house price indexes will rise by 2 to 3 percent next year as local market variances impact larger estimates.

Freddie Mac's Home Price Index (HPI) is expected to post modest growth of 0.6 percent in the first quarter before rising a more impressive 3.3 percent in Q2 as the active [COLUMN_BREAK]

selling season begins. The index will remain flat in Q3 before falling 1.4 percent in Q4, according to the projections. The expected annual growth for 2013 is 2.5 percent, less than half of 2012's anticipated 5.3 percent growth.

Meanwhile, household formations will increase, giving a boost to demand for homes. As unemployment falls to a projected 7.5 percent, the resulting job and income gains will lead to an annual net growth of 1.20 to 1.25 million households in 2013. In turn, that growth will lift construction activity: ""Housing starts should be up around the 1.0 million pace (seasonally adjusted annual rate) by the fourth quarter of 2013.""

At the same time, vacancy rates in both the apartment rental market and the single-family for-sale market are expected to continue trending downward. According to Nothaft, the gap between household formations and housing starts ""could bring aggregate vacancy rates down to levels last seen a decade ago."" While that news is good for property owners, it means tenants will likely see rents rise a bit faster than overall consumer-price inflation.

Like many other groups, Freddie Mac expects refinance activity to slip from this year to the next, though refinances will still largely drive the residential mortgage market. According to Nothaft, refinances are projected to decline for two reasons.

""[F]irst, many homeowners have locked in low rates in recent months and will have little financial incentive to refinance again; and, second, interest rates will likely be a bit higher a year from now than they are today, further reducing the financial incentive to refinance,"" he said.

As refinances dip, the expected pickup in purchase lending will likely not be enough to make up the difference. As such, single-family originations are forecast to decline about 15 percent. In the multifamily arena, however, ""permanent financing on new completions, property transactions, and refinance of loans exiting from ├â┬ó├óÔÇÜ┬¼├ï┼ôlockout' or ├â┬ó├óÔÇÜ┬¼├ï┼ôyield maintenance' periods is expected to translate into a rise of 5 percent or so in dollar originations.""

Fixed mortgage rates are expected to remain near record lows for the first half of the year before rising a bit in the latter half. However, the ""Federal Reserve's"":http://www.federalreserve.gov/ ongoing quantitative easing strategy will keep rates below 4 percent; thus, single-family homebuyer affordability will remain high in 2013--assuming the buyer has a good credit history, stable income, and sufficient savings.