Freddie Mac Maintains Positive Outlook amidst Housing Market Problems

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The economic outlook, as seen by the economists of Freddie Mac, shows worrying signs of less than optimistic employment results and overall slowdown in the economy for the first quarter of the year. This has been the case for the last 3 years wherein high expectations are offset by winter and economic slowdown. The spring home buying season was unable to neutralize the overall disappointing economic growth.  Despite 3 years of slow and uneventful growth in the economy, Freddie Mac’s chief economist Len Keifer remains positive.  This is because of the gradual increase in house sales which are shown by a small increase in mortgage applications.
While job reports are lower than expected, house sales are up 3% based on the number of people who have successfully applied for mortgages. There seems to be conflicting evidence on the outlook of the economy. On the one hand, house sales are up, but on the other, there is slow job growth. Freddie Mac expects that house sales will sustain its positive momentum. However, interest rates are forecasted to rise early third quarter of this year which will subsequently slow down the housing market.  By this time, creation of jobs is forecasted to increase along with higher wage rates which will cushion the impact of less affordable homes.
The feeble job report will influence the Fed’s decision on the interest rates. Given the subpar results, the Fed is hesitant to immediately raise interest rates. It is forecasted to gradually surge over the coming months, with a sharp increase at around September of this year.  In effect, a 30-year fixed-rate mortgage is predicted to be at approximately 4.3 percent.
The predicted rise in interest rates is largely caused by disequilibrium in the housing market in the next couple of years.  There is great demand in the housing market, but there is a lack of houses available for sale or rent despite attempts to address this issue such as the construction of over 300,000 houses and the conversion of studio units into rentals. Despite attempts to solve the disequilibrium, supply cannot keep up with the rise in demand with rental vacancy rates at its lowest since 1994.
The problem of disequilibrium in the housing market is not directly related to the job growth. In fact, there are areas such as the metro which experience robust job growth and at the same time insufficient supply of houses for sale or rent. This phenomenon is partly due to many sellers incurring great amount of debt which prevents them from selling their property, in other words, they are underwater. Statistics from Corelogic reaffirms the current problem with 5.4 million or 11.4% of underwater mortgages.
Aside from the number of sellers who are underwater, there is another reason for the deficiency. There is a demographic problem where there is an unbalanced distribution among the different generations. The problem is similar to a dumb-bell, where there are greater baby boomers and millennials than Generation X. This imbalance matched with the slowdown in the economy has led to a disruption in the normal cycle in the housing market. Traditionally, the young adults start as renters and will purchase their first house during their mid-20s. The size of the properties fluctuates throughout the years until retirement. Properties of the prior generation are then transferred to the next generation.
The problem lies with the transfer of property between generations. The Millennials are troubled by the unfavorable economic conditions which forces Generation X to soak in all the homes from the Baby boomers. Therein lies the problem because there is not enough of Generation X to cover all the homes that are willing to be sold by the baby boomers. Furthermore, the millennials are neither willing nor able to purchase the homes, given the economic slowdown.
Despite these problems, Freddie Mac maintains a positive outlook and predicts that the economic situation will stabilize over time. Prices of houses will continue to rise in the next couple of years, helping homeowners who are underwater to finally gain positive equity but this will become an obstacle to potential buyers looking to purchase before the rates rise.
The recovery will be slow and gradual. The optimistic forecasts of Freddie Mac have been revised a couple of times throughout the year which exhibits two things: the unpredictability of the housing market and the slower than expected economic recovery.  The result has been lower predictions for housing starts; however, the sluggish home sales results in the first quarter will lead to probable increase in demand and therefore improving home sales for the rest of the year.

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