Housing Seen as Emerging Bright Spot by Freddie Mac Economists

Even with the unexpected decline in the Gross Domestic Product (GDP) in the fourth quarter of 2012, Freddie Mac's chief economist Frank E. Nothaft, and deputy chief Leonard Kiefer, see housing as an emerging bright spot.   In the February issue of Freddie Mac's Outlook they point to a number of measures indicating that housing is an improving economic sector including that fixed residential investment made its first positive contribution to GDP growth since 2005, adding 0.4 percent to growth in the fourth quarter and 0.3 percent for the entire year.

December housing starts were above expectations, up 37 percent from December 2011 at an annual rate of 954,000.  Housing starts have posted year-over-year gains every month since September 2011.  Existing home sales rose 9 percent and new home sales 20 percent from December 2011 to December 2012 and house prices are increasing nationally.  The Freddie Mac House Price index is expected to rise 3 to 4 percent in 2013. 

The economists said that, despite the improvements, the level of housing activity is still near historic lows with room for substantial growth in housing and housing-related industries before we return to a more normal environment. Fannie Mae's projections for 2013 include an increase of 22 percent in housing starts to an annual rate of 950,000 units (from 780,000 in 2012) with another 26 percent increase to 1.2 million in 2014. 

Home sales have been recovering modestly since 2011, and finished 2012 at 5.02 million sales compared to 4.57 million in 2011.  Freddie Mac's projection is for 5.45 million sales in 2013 and 5.80 in 3014. 

House prices have bottomed out and, in most metro areas, begun rising again. The level of income in most markets suggests a continued improvement in home prices, and strong growth in sales and construction. The effect on sales should be accelerated as house price recovery allows homeowners who have been forced on the sidelines by negative equity to get back into the market.

The market is being helped in its recovery by near record high homebuyer affordability.  In the fourth quarter this National Association of Realtor measure was second only to that recorded in the first quarter of 2012.  This affordability metric incorporates the effect of low mortgage rates, low house prices, and gradually improving family income.

The recovery is still uneven geographically.  Many metro areas that had substantial growth in home prices and construction activity in the years leading up to 2006 then saw some of the largest declines.  "Somewhat ironically," Nothaft and Kiefer say, "it is many of these metro areas where current growth prospects are most positive, as they overshot the bottom leaving room for growth as these markets return to a more normal path."

The economists said that "The macroeconomic recovery though 2011 helped to forestall further erosion in the depressed housing market. In return, housing is now "showing some love" by contributing to economic growth, perhaps by adding close to 0.5 percentage points to 2013 GDP growth."