2015: Economic Growth will Drive Household Formation and Housing Activity

By: Jann Swanson •

The prognosticators are already gearing up for the New Year and at least one foresees a strong economy in 2015.  Freddie Mac's chief economist Frank E. Nothaft is forecasting 3.0 percent growth in the economy which would make 2015 only the second year in the last decade with growth at that pace or better.   

His forecast, published in Freddie Mac's Executive Perspectives blog, is based on several factors; the governmental fiscal drag has turned into fiscal stimulus, lower energy costs will support both consumer spending and business investment, further easing of credit for business and real estate lending will support commerce and development, and more upbeat consumer and business confidence will stimulate growth.  That growth, he says, will produce more and better paying jobs which will in turn support household formation and housing activity. 

On the other hand he also sees a stronger dollar which may dampen exports.  Also the September poll of the Federal Reserve's Open Market Committee members showed a clear consensus for boosting the Federal funds target rate in 2015.  Nothaft said that while higher interest rates generally detract from housing activity, when coupled with strong job and income growth the net result can be increases in household formations, construction, and home sales.

Nothaft makes the following specific projections.

  • At the beginning of November the 10-year Treasury note was at 2.3 percent and the 30-year mortgage at 4.0 percent but this is likely the bottom. Interest rates will probably climb throughout the coming year, averaging about 2.9 percent for 10-year Treasuries and 4.6 percent for the 30-year mortgage.

 

  • Home prices will continue to rise but not at the 9.3 percent pace seen in 2013 or even the 4.5 percent growth thus far in 2014. Nothaft expects a 3.0 percent appreciation in 2015 and this, along with rising rates, "will dampen homebuyer affordability." This will be offset somewhat by rising incomes but those are still expected to be modest, at least in the near term. While there will be "an affordability pinch in most of the country, this will mean a decline from very high levels to merely high levels in most markets.

 

  • Housing activity will accelerate in 2015 with housing starts rising by 20 percent compared to 2014 and home sales up 5 percent. Single family housing will account for most of the growth in construction but rental apartment starts will also be up. Growth in construction and home sales will help bolster mortgage markets.

 

 

  • Nothaft says that despite expected increases in home sales and thus in purchase money volume overall originations will fall due to waning refinancing activity. In 2012 there was over $2.1 trillion in total single-family mortgage originations, largely due to refinancing but total origination fell 9 percent in 2013 and a total of 38 percent from 2012 to 2014. He projects an additional decline of 8 percent from 2014 to 2015. After that rising home values and increasing purchase originations will finally compensate for the decline in refinancing which he anticipates will account for only 20 to 25 percent of mortgage activity next year.

 

 

  • If household formations increase as expected the new households will probably make rentals their first home. Current rental vacancies are near the lowest levels since 2000 and rent growth exceeds inflation in most markets, prompting new development and gains in property values. That has led to property sales and new mezzanine debt. Multifamily mortgage originations are up about 60 percent since 2011 and further increases are expected in 2015.