The U.S. housing recovery has hit a soft patch but is showing signs of revival. The economy has provided modest support for housing. However, fundamentals for housing are solid and should improve. Lenders are slowly loosening credit; foreclosures continue to fall as a share of total home sales; affordability is down but still remains at high levels; mortgage rates are up but still historically low and Fannie Mae and Freddie Mac are providing needed funding to the housing marketplace.

Economy is Providing Modest Support

Although job gains disappointed in December, monthly job gains are averaging about 190,000. GDP growth has been modest, averaging between 2% to 2.5% growth over the past two years. Fiscal support is expected to improve and the Federal Reserve continues to provide steady monetary support with it asset purchase program.  Consumer confidence has fallen off due to the recent fiscal/congressional  fiasco. The manufacturing sector continues to expand and retail sales remain volatile but rising throughout this past year.

Housing Outlook

Even though housing has slowed due to higher mortgage rates and a government shutdown, fundamentals for housing demand are solid and are expected to improve. Inventories will remain lean, home prices will continue to  rise and the economy will grow at an acceptable pace. The job market which is a driver for housing demand is expected to improve.

Rising home prices are reducing the number of negative equity households, which is expected to generate more trade up buying. 
Household credit has improved and mortgage delinquency rates are as low as 2008-- prompting lenders to loosen credit further.

Affordability has eroded but will remain historically high. The higher costs of financing due to higher mortgage rates will be more than offset by job and income gains. The foreclosure crisis will fade substantially in the next twelve months.

Housing Forecast

                                            2012                    2013                    2014
EHS                                    4,660,000            5,130,000            5,210,000
NHS                                    368,000                433,000               520,000
Starts                                782,000                919,000                1,116,000
30-yr mortgage rates        3.7%                      4.0%                    5.2%   
Home Prices                       6.4%
                     11.3%                  5.6%          

Risks to the Forecast
  • The forecast assumes the labor market will be relatively robust in 2014 generating 200,000 to  250,000 non-farm payroll jobs per month
  • Congress and the Administration will continue to cooperate on budget and debt ceilings-- another words, we assume no more government shutdowns
  • The Federal Reserve can unwind its monetary stimulus without causing a spike in long term interest rates
  • Economies overseas can absorb the rise in U.S. interest rates without significant disruption
  • Energy and other commodity prices will remain stable
  • The foreclosure crisis is winding down
  • Congress revamps Fannie/Freddie business model in a way that does not threaten the housing expansion

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