The monthly housing commentary published by Fannie Mae's economists noted some downsides to the market in early 2013.  Housing starts tumbled in January, largely due to weakness in the multi-family sector, then builder confidence fell in February as buyer traffic ebbed.  On the positive side, however, was a steady improvement in single family building permits as January marked the fifth consecutive month of increases.   

Existing home sales dipped slightly in December then remained essentially unchanged in January, possibly because of a tight inventory of homes for sale, especially in the lower price ranged.  There is currently a 4.2 month supply of available homes for sale, the lowest level since the end of 1999.

Sales of new homes jumped 15.6 percent in January, the biggest monthly gain in nearly two decades and the highest level of sales since July 2008.  Inventories were low there as well, 4.1 months, compared to 12.2 months three years ago.

Leading indicators of home sales - purchase mortgage applications and pending home sales - picked up in January.  Pending sales were are the highest level since April 2010, just before the effective deadline for the homebuyer tax credit. However, purchase mortgage applications fell in three out of four weeks in February and then rebounded strongly in early March, suggesting that the ongoing recovery in home sales could be bumpy during the first half of this year.

Tight inventories and a declining share of discounted distressed sales are driving prices higher.  Most measures of home prices showed the strongest rate of appreciation since 2005.  Prices (not seasonally adjusted) rose 0.7 percent in January, according to the CoreLogic home price index and were up 9.7 percent from a year earlier.  Fannie Mae said it expects home prices to firm further amid a durable housing recovery, continuing to boost household net worth, gradually diminishing the population of underwater borrowers, and reducing incentives for strategic defaults.

Other housing fundamentals, including household formation and loan performance, are also improving. The short-term delinquency rate dropped during the fourth quarter to its lowest level since mid-2007, helped by the improving job market. With fewer new delinquencies, the foreclosure start and foreclosure inventory rates continued to fall to their lowest levels since 2007 and 2008, respectively.

The shadow inventory of housing, properties that are seriously overdue or in foreclosure, have also have trended down roughly 3 percentage points below its peak of 9.7 percent at the end of 2009.

Long-term interest rates have trended up since the beginning of 2013, sending the 10-year Treasury yield to above 2.0 percent for the first time since April of last year. Fannie Mae's economists expect mortgage rates to rise gradually to slightly above 4.0 percent by the end of 2013 as economic growth firms in the second half of the year. Any increase will also depend on increases in the guarantee fee charged by Fannie and by Freddie Mac.  Consumers are already anticipating higher rates as documented in the Fannie Mae February National Housing Survey which also showed that nearly half of all borrowers have never refinanced their mortgages.  The year-end deadline for the Home Affordable Refinance Program (HARP) should prompt some borrowers to refinance soon to take advantage of more favorable mortgage terms and add to their disposable incomes, helping to offset ongoing fiscal drag.

Fannie Mae's forecast of housing activity is little changed from the prior forecast, with total home sales projected to rise by about 11.0 percent, supported by a rebound in household formation, historically high housing affordability, improving sentiment toward the housing market, and continued strong demand from investors.  Home prices should to increase further this year and next, but at a more moderate pace than in 2012. As a result, purchase mortgage originations should rise to $619 billion in 2013 from an estimated $530 billion in 2012. However, expected rising mortgage rates should sharply reduce organic (non-HARP) refinance originations. Refinance originations will decline to about $1 trillion from an estimated $1.4 trillion in 2012, resulting in a refinance share of 62.0 percent in 2013.