Headwinds for Housing Overall, but Some Markets are Hot -Freddie Mac

Asrna rule, it isn’t good when economists use words like “sluggish” and “lackluster,”rnthe very terms that crept into the opening paragraph of Freddie Mac’s June 2014 U.S. Economic & Housing MarketrnOutlook.  Billed as a “mid-yearrnassessment” the report by Freddie Mac’s chief economist Frank E. Nothaft andrndeputy chief Leonard Kiefer said that the year had started out as far morernsluggish than they had anticipated.  Existing home sales have slipped 7 percent comparedrnto the same period in 2013 and new home sales are off 3 percent.  They first applied the word lackluster to housingrnconstruction although it wasn’t the only time they used it.  Building permits and housing starts were bothrnlower in the first four months of this year than last. </p

Therernwas a bright spot in construction, multifamily rentals.  Starts for units in buildings with five orrnmore jumped 15 percent in the first four months of the year compared to 2013rnand vacancies dipped to 4.0 percent, a decline of 4 basis points from the firstrnquarter of 2013 and the lowest recorded by the Reis survey since 2000.</p

Whilernthe economists expect a 3 percent growth in the GDP over the next few quartersrnthe dismal showing in the first quarter will probably bring the year overallrndown to 2.0 to 2.5 percent, partially because of the “lackluster” housingrnactivity.  Residential fixed investmentrndeclined by an annualized 5.0 percent in the first quarter compared to 2013rnwhen it contributed 0.33 percent to overall GDP growth.</p

Employmentrnnews is a bit better with unemployment down from 6.7 percent in January to 6.3rnpercent.  Non-farm payrolls increased byrn217,000 in May, exceeding the pre-recession peak for the first time constructionrnjobs are picking up, especially in the residential building and specialty tradernsector. Increased job growthrnwill help to boost householdrnformation, which has been lagging throughout the recovery. In the long run, household formations are almost entirelyrndriven by demographics, but in the short run job and incomerngrowth are critical.</p

Homernprice and rent increases have moderated and Nothaft and Kiefer view that asrngood news, a move toward more stable and sustainable gains.  The 9.3 percent growth of the Freddie MacrnHouse Price Index in 2013 is expected to slow to 5.0 percent this year.  Rents will likely continue to rise by aboutrn3.0 to 3.5 percent over the next year.</p

Therneconomists are lowering their overall home sales forecast for the year from 5.5rnmillion to 5.4 million, 0.1 million below the 2013 pace.  Inventories of available homes remain limitedrnin some markets because existing homes remain underwater or because potentialrnsellers are unwilling to give up the low interest rates they gained throughrnrecent refinancing.  Purchase mortgagernapplications have increased a bit recently but are running 13 percent below thernpace last year. </p

Thernyear-over-year decline in mortgage applications was primarily the result ofrninterest rates which spiked last June and triggered a rapid drop in refinancernoriginations and stunted the purchase market. rnRates have gradually come down from the high of 4.58 percent reached inrnlate August and Freddie Mac sees them likely to remain near current levels ofrn4.25 percent but not for long.  As thernFed tapers its purchases of long-term mortgage-backed securities and economicrngrowth picks up, fixed-rates may approach 5 percent by this time next year.  </p

Homernsales are likelyrnto be slightly lower this year. Inventory of for-sale homes remainsrnlimited in some markets as many sellersrnremain underwater or prefer to keep the very low-rate mortgagernthey refinanced into, holdingrnback a full recovery in the overall sales market. Home purchase applications have picked-up a bit recentlyrnyet they’re still currentlyrn13 percent below last yearrnand Freddie Mac is lowering its overall homes sales forecast from thernsame 5.5 million sales as last year to 5.4 million.</p

The limited inventory in many marketsrnwill help sustain house price and rent growth but affordability may suffer.   The inventory is extremely tight on the westrncoast and Texas and Louisiana but the market is not as tight in the southeast. </p

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(bigger circles = more homes for sale.  The color of the circle corresponds to the percentage of homes for sale per total in the area.  In other words, the RED side of the spectrum connotes tight inventory.  The BLUE side connotes too much inventory).</p

Vacancy rates remain high by historicrnstandards but continue to decline.  Thernhomeowner vacancy rate stood at 2.6 percent in the first quarter of 2010 but atrn2.0 in the first quarter of this year.  rnDuring the same period the total number of vacant units (homeowner andrnrental) decreased by 4.2 percent and the number of vacant units for sale byrn24.2 percent.</p

Nothaft and Kiefer attribute the lowrnfor-sale inventory to several factors including the reluctance of owners torngive up existing low interest rates.   REO sales have been trending lower as lendersrnand homeowners have made more frequent use of alternatives such as loanrnmodifications and short sales.  Short salesrnhowever have been sharply curtailed since Congress allowed the Mortgage DebtrnForgiveness Act to expire at the end of last year although rising homes pricesrnand interest rates have also played a role.   CoreLogic puts the share of home salesrnattributable to short sales at 1 percent in March compared to 9 percent inrnDecember 2012.</p

Rentalrnmarket conditions have continued to tightenrnas well. The Census Bureaurnputs vacancies at an average of 8.4 percent nationwide over the last fourrnquarters, the lowest such average in 14 years. The National Multifamily HousingrnCouncil’s Market Tightness Index was up considerably in April compared with three months earlierrnindicating that property managers in most metro areas have experienced lower vacancy rates and/or higherrnrent increases. Reis reported that effective rents were up 3.2 percent duringrnthe first quarter comparedrnwith a year earlier,rnand the Bureau of Labor Statistics’ residential rent indexrnwas up 2.9 percent over the first four months of 2014 comparedrnwith a year ago; both increases outpace overall consumer price inflation.rn</p

With vacancy rates moving back in line with historical averages and for-sale inventories remaining tight it is likelyrnthat the home price indices will continue above inflation growth for the restrnof 2014 although at a slower pace than last year. Rents will also rise fasterrnthan inflation but new construction coming on line will slow those gains. The important question is how much further will prices and rents have to rise to give incentives for more existingrnowners to list their property for sale and developers to bring more supply to the market.rnConstruction has rebounded over the past two years but is still significantly below the levels one would expect to see given projections of household formations.

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