"Taper Talk" Hurts, But Not Enough to Stall Recovery – Freddie Mac

Freddie Mac calls “Taper Talk” isrnthe main topic of conversation in the financial world, that is,rnspeculation about the timing and speed that the Federal Reserve willrnemploy as they scale back their policy of quantitative easing. “rnThis speculation has prompted the recent roller coaster in interestrnrates and a ride where the exit will be at a higher rate level thanrnthe entrance,” the company’s chief economist Frank E. Nothaft andrndeputy chief Leonard Kiefer say in the current issue of Outlook.</p

Echoing similar analysis from Fannie Mae out this morning, Freddie says that while higher interest rates on mortgages will slow the housing recovery,rnthey are unlikely to stop it in its tracks. In the first half ofrnthis year the economy added 1.2 million net jobs, the best pickup inrnnonfarm payrolls for a similar period since 2005. More than 100,000rnconstruction jobs were added due to a spike in housing starts and thernincrease in employment will mean more Americans will have thernresources to form separate households and further bolster housingrndemands. Nothaft and Kiefer say they expect this pace in job growthrnto continue in the second half, making 2013 the best year for growthrnsince 2005.</p

They don’t, however, expect the rapidrnpace of home price appreciation to continue at the double digitsrnannual increases of recent months. Seasonally adjusted values werernup about 5 percent in just the first half of 2013 but will likelyrnmoderate to 3 to 4 percent in the second half for an annual gain of 8rnto 9 percent for the year and then settle in around 3 percent inrnsubsequent years. When adjusted for a 2 to 2.5 percent inflationrnrate this will make real appreciation about 0.5 to 1 percent perrnyear, about in line with historic numbers. </p

Sales likewise have increased dramatically, up over 10 percent inrnthe first five months of this year compared to the same period inrn2012 and new home sales are up 29 percent. The volume of new homernsales have led to a 24 percent increase in single-family housingrnstarts and the above referenced new construction jobs. And likewisernthe Freddie Mac economists do not anticipate this surge willrncontinue. They anticipate sales of new and existing homes to addrnan additional 2 percent this year and to rise 12 percent relative tornthe first half of the year. </p

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The recovery in the multifamily market may have peaked with valuesrnrecovering earlier and faster than house prices. Vacancies inrnprofessionally managed buildings are low and rents are expected torngrow faster than inflation this year. Absorption rates for new unitsrnwas 65 percent in the first quarter of 2013.</p

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Mortgage rates have received much recent attention with thern30-year fixed-rate mortgage up a full point in the first five months.rn Much of the increase was due to “Taper Talk,” which led tornincreased rates first because market participants anticipate that Fedrntapering will increase interest rates in the near future, and second,rnthey see the Fed taper talk as being indicative of a strengtheningrneconomy. “The real question is not what effect rising mortgagernrates will have on the housing recovery – there’s sure to be anrnimpact – but will it be enough to stall the recovery? We don’trnthink so,” the two economists say. “Demand is strong, supply isrnlimited, and for most families in most markets, housing affordabilityrnis still strong. But we do expect a substantial change inrnsingle-family originations as we transition from arnrefinance-dominated market to a much smaller purchase-money market byrnyear-end.”

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