Housing and Economy Probably Heading Downhill

Deja vu all over again?

Freddie Mac says economic growth is recovering
from a weak first half of the year, the labor market is holding steady and Fed
watchers are concluding that a rate hike will come in December; worldwide
economic growth is weak and appears likely to get worse.  The company’s economists add, “We’ve been
here before
… last year.”

The economy continues to sputter
along and the housing market continues to be a bright spot although with “less
room to run than in the prior few years.” Refinance-spurred mortgage activity is
starting to slow
as rates rise and that will persist into 2017 as the mortgage
market becomes more purchase-dominated.

Freddie Mac’s Outlook for October closely mirrors predictions in the Fannie Mae
forecast earlier this month with a prediction of full-year GDP growth of 1.6
percent and a slightly better rate of 1.9 percent in 2017.

The volatility in financial markets
has increased this month with a
prediction of full-year GDP growth of 1.6 percent anafter a quiet summer.  Post Brexit, the yields on 10-year Treasuries
fell to a record low of 1.37 percent on July 5 then bounced back, remaining between
1.45 and 1.65 from mid-July through the beginning of September. Over the past
month and a half yields have risen, reaching as high as 1.79 percent on October
12.  As rates dropped so did the implied chances
of a Fed rate like this year, to below 50 percent.  Now it has risen to 67 percent

Unlike Fannie Mae which has long said there
will not be a hike this year, Freddie Mac still expects at least one but points
out that doesn’t mean mortgage rates will necessarily rise.  That will depend more on global growth and
worldwide bond yields. The latter are now off their post-Brexit lows, but most
remain below pre-Brexit levels with Japanese and Swiss bonds still negative.  The International Monetary Fund recently lowered
their outlook for global growth.

Even if those bonds recover to their
pre-Brexit levels Freddie Mac sees mortgages rates remaining low for an
extended period
. The 30-year mortgage was still below 3.5 percent when the Outlook went to press and their forecast
calls for a gradual rise in rates throughout the remainder of 2016 and into
2017, with the 30-year fixed-rate mortgage averaging 3.9 percent in the fourth
quarter of 2017.

Low rates alone, however, will not drive
housing starts much higher. There will be an increase in starts, but a gradual
one.  Home builders still face land and
labor constraints
and while construction job openings have risen considerably,
hiring has been flat. Housing construction’s slow recovery, especially new single-family
homes lead to a forecast of a 7 percent year-over-year increase in starts for
2016 and 14 percent in 2017 and even these total housing starts will not meet
the long-run housing demand of that period.

Despite the slow recovery in new
home sales, total home sales will probably have their best year in a decade and
existing home sales have nearly returned to pre-recession norms with the ratio
of existing home sales to owner households back in the historical averaged range
of about 6 percent. per year.



Freddie Mac’s published an article
earlier this month pointing to the decline in mobility and now say existing
home sales might not have much room for improvement.  The National Association of Realtors showed
repeat homebuyers expect to live in their current home for 15 years
(first-timers expect to remain in their home 10 year), up from 9 years (6
years) in 2006 and the Urban Institute says this declining mobility is
affecting the mortgage market. This means that existing home sales are probably
close to an equilibrium level.

They forecast a slight decline in seasonally
adjusted total home sales in the fourth quarter. Increased construction of new
homes will push total sales slightly higher in 2016, to 6.16 million in 2017
compared to 6.04 million in 2016.

Limited inventory and strong buyer
demand continue to promote a robust level of price growth–about 6 percent on
an annual basis through last June.  Low
mortgage rates are helping to offset the impact on affordability and the labor market is starting to show signs of wage growth. The
considerable momentum in house prices will probably continue and the economists
look for 5.6 percent growth in 2016, moderating to 4.7 percent in 2017.

The housing market should have begun
its seasonal cooling, but mortgage application data show refinancing activity,
while slowing from summertime highs, is still running about 30 percent higher
on a year-over-year basis.  Any upward
movement in mortgage rates, however, will depress refinancing activity and
Freddie Mac expects the volume of refinancing in 2017 will fall to just under
$600 billion from this year’s anticipated $1 trillion. Home purchase and home
improvement mortgage activity will somewhat offset this, rising from $1
trillion in 2016 to $1.15 trillion in 2017. Total mortgage originations will
fall about 18 percent from 2016 to 2017 according to the Economic and Housing
Research Group’s forecast.

Article source: http://www.mortgagenewsdaily.com/10202016_freddie_mac_outlook.asp

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