There is certainly no dearth of economic and housing forecasts afoot in the land. Freddie Mac starts out its current U.S. Economic & Housing Market Outlook by comparing this January with last. Back then, we are reminded, "interest rates were rising, growth was sluggish, and disruptive weather from a polar vortex reduced economic growth in the first quarter by about one percent."
Today mortgage rates are down, jobs are up, and failing oil prices are providing a big boost to individuals and the economy. The question Frank E. Nothaft and Leonard Kiefer, Freddie Mac's chief and deputy chief economist ask is "whether or not households and businesses will be able to seize these opportunities and make the most of them." The two point out that many of these opportunities may be, as television pitchmen say, available for a limited time only.
Nothaft's and Kiefer's recap of where rates have traveled over the last year or so are familiar to MND readers as is their summary of the strong job growth and economic resurgence that came about after the nation recovered from that awful first quarter of 2014. So where do the economists think we are going and how should people and business be ready for the ride?
Looking at future mortgage lending activity, Freddie says there are $361 billion in 30-year fixed-rate agency mortgage-backed securities outstanding with a 4.5 percent coupon and another $479 billion with a coupon greater than 4.5 percent. Many of the mortgages underlying those MBS have an interest rate of 5 percent or higher and so borrowers have a strong incentive to refinance at today's rates. Freddie Mac also expects the current low rates to boost the purchase market so that it reaches the highest levels since 2007.
Even as the job market improved many potential homebuyers have been unable to purchase a home because high rents are preventing them from saving enough for a down payment. The economists see the new mortgage programs announced by Freddie Mac and Fannie Mae which will allow as little as 3 percent down for purchase or refinancing as well as the roll-back in FHA annual premiums which begins this month to be positive changes, making home buying more feasible, especially as labor markets continue to improve and more Millennials begin to form households.
And Nothaft and Kiefer do expect that labor market to improve and more importantly for wages to do so as well. Wage growth actually declined by 5 cents per hour in December and the 1.7 percent increase in average hourly earnings over the course of the year barely kept up with inflation. But both the Conference Board Consumer Confidence Index and the National Federation of Independent Business Index reached respective six and eight year highs in December, indicating that consumers are more optimistic about economic conditions and small businesses expect to increase employee compensation this year.
The Outlook calls gas prices the big surprise of the year. Energy savings, it says, are serving to somewhat offset the lack of wage growth in consumers' pockets. But falling gas prices, they remind us, could also have a downside for housing markets, some of which, like cities in North and South Dakota and some parts of Texas, had strong growth even during the housing crisis arising almost solely from energy industry activity.
As for that "limited time only" warning, Nothaft and Kiefer see several such opportunities in the domestic housing market. One, the downward pressure on interest rates, inflation, and gas prices because of weakness elsewhere in the world and a flight to safety in U.S. Treasuries. Over time, they predict, the global economy should stabilize and many of these trends will reverse themselves. In addition, domestic economic policy may affect rates. They expect the relatively low rates we are seeing now to last through the first half of the year and then begin to move higher.
One key consideration is the timing for a change in Federal Reserve Policy on short term interest rates. When they do start to raise them, and some think it will be this year, they may do so repeatedly. Freddie Mac is forecasting that the 1-year constant maturity treasury yield will be up nearly one point by year end with most of that increase dating from the first Fed move.
Still, Freddie Mac doesn't expect to see mortgage rates spike dramatically. "There is always the potential for large short-term movements in bond markets, like with the Taper Talk of June 2013, but the longer term trend should be for only a gradual increase in rates." The company's economists believes there is still a lot of room before rising rates do any harm to growth or housing markets.
While right now the effects of the global slowdown on the U.S. appear positive, i.e. lower interest rates and gas prices, if it persists the result could be declining exports and lower growth at home. The consensus forecast is for growth to pick up in most of the world but for Europe to lag behind.
Nothaft and Kiefer conclude that the economy has a great opportunity to expand in 2015 with the delayed increase in interest rates and dropping oil prices helping to spur growth. "Until rates start to rise later in the year, housing markets should respond positively and we anticipate increases in home sales and continued improvement in construction activity. With rates lower at the beginning of the year, we'll see higher than expected refinance volume, but expect refinance volume to drop quickly as rates rise."
