Freddie Mac released today its U.S. Economic and Housing Market Outlook for December, looking back at five key housing predictions for 2014, how they fared, and what that means for housing and the economy in 2015.
Several key elements of projections for 2014 were spot on: the shift to a purchase-money dominated primary market, a more modest pace of house-price gains in national indexes, and the continuing renaissance in the apartment rental market. However, other consensus projections were off, such as expectations for a pickup in home sales (and, hence, single-family starts) and a rise in mortgage rates, according to Frank Nothaft, vice president and chief economist at Freddie Mac.
"The recent drop in oil prices has been an unexpected boon for consumers' pocketbooks and most businesses. Economic growth has picked up over the final nine months of 2014 and lower energy costs are expected to support growth of about 3 percent for the U.S. in 2015," said Nothaft. "Therefore we expect the housing market to continue to strengthen with home sales rising to their best sales pace in eight years, national house price indexes up, and rental markets continuing to display low vacancy rates and the highest level of new apartment completions in 25 years."
Mortgage Originations: One key trend expected for 2014 was a huge drop in refinance activity and the emergence of the first majority purchase-money origination market in 14 years, said Nothaft. However, gains in purchase-money originations did not offset the dramatic drop in refinance activity in 2014, and we expect an eight percent further decline in single family originations in 2015.
What happened? The shift in origination activity did materialize in 2014 and Freddie Mac expects it to continue in 2015, with purchase-volume gains unlikely to make up for further declines in refinance activity. The agency projects an 8% further decay in single-family originations in 2015, even though purchase-money volume will rise.
Home Values: After nearly double-digit house price gains in 2013, home value gains moderated, as expected, to a 4.5%pace in 2014. Expect gains to continue to moderate in 2015 with an annualized growth rate of 3%.
What happened? As expected, home value increases did continue but at a more moderate clip in national metrics for 2014. Between September 2013 and September 2014, the FMHPI continued to rise, but at a more modest 5%. For 2015, we expect further moderation in the national FMHPI growth, to about 3%.
Rental Market: As anticipated, the rental market continued to lead the housing recovery in 2014. Rental vacancies fell to the lowest level since 2000, absorption rates on new apartment rentals rose, and developers started the largest number of rental apartments in 25 years. Strong fundamentals point to further origination gains in the multifamily sector over the next two years and up about 14% in 2015 over 2014.
What happened? The rental market had a very good year. Rental vacancy rates fell to the lowest level since 2000, absorption rates on newly built apartment rentals rose, and developers started the largest number of rental apartments in 25 years. Rent growth exceeded inflation in most markets, and property values moved higher.
Home Sales: Most expected homes sales to see healthy gains in 2014, but a weaker than expected economy and harsh winter had a significant drag on sales in the first half of the year. The economy and homes sales recovered in the latter half of 2014, and we expect this to continue in 2015, projecting a 4% rise in home sales to 5.6 million, the highest level of annual sales since 2007.
What happened? Contrary to expectations, the economy contracted at a 2.1% annualized rate during the first quarter of 2014, raised fears of another lackluster macroeconomic environment, and calendar-year growth will likely end up 0.5 to 1.0% slower than in 2013. Adding to the shivering housing demand was the depth of the 'polar vortex' that gripped the nation during the first quarter, an "external shock" that is always hard to predict. And while macroeconomic data are seasonally adjusted, the adjustment accounts for 'typical' seasonal patterns, not for severe disturbances.
Mortgage Rates: Contrary to expectations, mortgage rates drifted lower in 2014 with the average 30-year fixed-rate mortgage hovering just below 4% in early December. A weaker than expected economy and employment picture accounted for the Fed maintaining its accommodative monetary policy which kept rates low. As the economy strengthens in 2015, rates on the 30-year fixed mortgage should climb gradually, averaging 4.4% and remaining below 5% throughout next year, according to Nothaft.