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2015: Economic Growth will Drive Household Formation and Housing Activity
The prognosticators are already gearing uprnfor the New Year and at least one foresees a strong economy in 2015. Freddie Mac’s chief economist Frank E.rnNothaft is forecasting 3.0 percent growth in the economy which would make 2015rnonly the second year in the last decade with growth at that pace or better. </p
His forecast, published in Freddie Mac’s ExecutivernPerspectives blog,rnis based on several factors; the governmental fiscal drag has turned intornfiscal stimulus, lower energy costs will support both consumer spending andrnbusiness investment, further easing of credit for business and real estaternlending will support commerce and development, and more upbeat consumer andrnbusiness confidence will stimulate growth. rnThat growth, he says, will produce more and better paying jobs whichrnwill in turn support household formation and housing activity. </p
On the other hand he also sees arnstronger dollar which may dampen exports. rnAlso the September poll of the Federal Reserve’s Open Market Committeernmembers showed a clear consensus for boosting the Federal funds target rate inrn2015. Nothaft said that while higher interest rates</bgenerally detract from housing activity, when coupled with strong job andrnincome growth the net result can be increases in household formations,rnconstruction, and home sales. </p
Nothaft makes the following specificrnprojections.</p<ul class="unIndentedList"<liAt the beginning of November thern10-year Treasury note was at 2.3 percent and the 30-year mortgage at 4.0rnpercent but this is likely the bottom. Interestrnrates will probably climb throughout the coming year, averaging about 2.9rnpercent for 10-year Treasuries and 4.6 percent for the 30-year mortgage.</li</ul
</prn<ul class="unIndentedList"<liHome prices will continue to risernbut not at the 9.3 percent pace seen in 2013 or even the 4.5 percent growthrnthus far in 2014. Nothaft expects a 3.0rnpercent appreciation in 2015 and this, along with rising rates, “will dampenrnhomebuyer affordability.” This will be offsetrnsomewhat by rising incomes but those are still expected to be modest, at leastrnin the near term. While there will be “anrnaffordability pinch in most of the country, this will mean a decline from veryrnhigh levels to merely high levels in most markets. </li</ul
</prn<ul class="unIndentedList"<liHousingrnactivity will accelerate in 2015 with housing starts rising by 20 percent</bcompared to 2014 and home sales up 5 percent.rnSingle family housing will account for most of the growth inrnconstruction but rental apartment starts will also be up. Growth in construction and home sales willrnhelp bolster mortgage markets. </li</ulrn<ul class="unIndentedList"</ul
</prn<ul class="unIndentedList"<liNothaft says that despite expectedrnincreases in home sales and thus in purchase money volume overall originationsrnwill fall due to waning refinancing activity.rnIn 2012 there was over $2.1 trillion in total single-family mortgagernoriginations, largely due to refinancing but total origination fell 9 percentrnin 2013 and a total of 38 percent from 2012 to 2014. He projects an additional decline of 8 percentrnfrom 2014 to 2015. After that risingrnhome values and increasing purchase originations will finally compensate forrnthe decline in refinancing which he anticipates will account for only 20 to 25rnpercent of mortgage activity next year. </li</ulrn<ul class="unIndentedList"</ul
</p
</prn<ul class="unIndentedList"<liIf household formations increase asrnexpected the new households will probably make rentals their first home. Current rental vacancies are near the lowestrnlevels since 2000 and rent growth exceeds inflation in most markets, promptingrnnew development and gains in property values.rnThat has led to property sales and new mezzanine debt. Multifamily mortgage originations are uprnabout 60 percent since 2011 and further increases are expected in 2015. </li</ulrn<ul class="unIndentedList"</ul
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Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.
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