Freddie Mac Pulls a 180 in Housing Outlook

Rather than taking a step back this year, home sales
now seem ready to best their 2016 numbers.  Freddie Mac’s economists admit that, up until
this month, their expectations were for the former (i.e. a ‘step back’), but based on recent data,
they now see the U.S. housing market “on track to eclipse last year as the best
in over a decade.”

The company’s May Outlook
credits housing’s strong launch into 2017 in part to the surprising downward
of interest rates since March. 
Favorable rates, along with strong job growth, have bolstered housing
demand, even as economic growth remains tepid-only 0.7 percent GDP growth in
Q1.  Still, despite the slow growth,
blamed to a large degree on weak consumer demand, the labor market “keeps
plugging along” with the lowest unemployment rate since 2001 (4.4 percent) and
79 straight months of job growth.

After rising to 4.3 percent in March, mortgages rates
have dipped back down in the 4.0 percent range and have been holding
there.  Freddie Mac expects them to head
higher later in the year. Monetary policy will push short term rates higher and
that, combined with Consumer Price Index-measured inflation predicted to
increase about 0.6 percentage points, will drag long term, and mortgage rates,
along.  The increases will be measured, they
say, with the 30-year fixed rate mortgage averaging 4.3 percent in the fourth

The company says existing home sales
in March were the highest since 2007 and new home sales beat expectations as
well, making total first quarter sales overall the highest since 2007. (Ed. Note: The report was written before the
release of April data earlier this week showed both new and existing home sales
retreating from March levels.

The year got off to a good start in
the construction area as well, with housing starts the highest since 2007
through the first quarter, but even at that, running lower than long-term
demand. Tight inventories continue to boost home price growth, which averaged
6.4 percent year-over-year in March per the Freddie Mac House Price Index.

All-in-all Freddie Says, 2017 is
shaping up to be the best year for housing in over a decade.

Mortgage originations have also been
a surprise
, with data that indicates origination volume about $60 billion
higher than the company had forecast, primarily due to the continued strength
of refinancing.  Forty-nine percent of borrowers
took cash out when they refinanced in the first quarter, up from 44 percent the
previous quarter. This is the highest share since the fourth quarter of 2008,
but still below the peak of 89 percent in the third quarter of 2006.

Cash-outs have picked up while low
rates continued to support rate/term transactions.  Recent declines should help spur refinancing
while home sales will increase purchase loan originations. “Putting it all
together we have increased our 2017 forecast for mortgage originations by just
over $200 billion and added $100 billion to our 2018 forecast,” the economists

While more borrowers are cashing out
when they refinance, the net home equity that was cashed out declined from
$19.1 billion in the fourth quarter of 2016 to $14.0 billion in the most recent
period. Cash-out volume peaked at $84 billion in the second quarter of 2006.

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