An upbeat Freddie Mac housing forecast released Wednesday predicts an increase in housing starts and demand for single-family homes, despite a projected 0.8 percent increase in interest rates by the end of 2015.
Freddie Mac’s monthly U.S. Economic and Housing Market Outlook expects 1.3 million housing starts in 2015 and that the average interest rate on a 30-year fixed mortgage will approach 5 percent in one year if current economic conditions hold.
“We are getting closer to a more normalized economy, and now we are expecting to see housing driven by fundamentals,” the forecast stated. “Single-family housing markets have been recovering from a very deep recession and have been operating far away from normal. After several years of weakness, we are starting to see the labor market pick up steam, having added 230,000 net new jobs on average for the first seven months of this year.
“It’s no surprise more and better jobs lead to great housing demand … As the steadily improving labor market expands, this will stimulate housing activity.”
One weakness is in household formation. Formations totaled 458,000 over the past four quarters, while projections put them at 1.2 million or more. The number of persons per household is steadily increasing, and more people living together means fewer people stretching out into single-family homes.
The report stated, however, that there are 3 million “missing households” set to enter the housing market. Those households will strain the rental market, which is experiencing decade-low vacancy rates, leading to a possible spillover into single-family homes.
Freddie Mac based its projections off current economic and U.S. Census Bureau data, and assumed that the unemployment rate will continue to decline and that the U.S. economy will grow at least at a 3.3 percent rate through 2015.
“A recovering housing sector will sustain the rally in homebuilding despite likely increases in long-term interest rates. Increased construction activity will further accelerate the improvement in labor markets and fuel even more household formations and more housing demand,” Freddie Mac Chief Economist Frank Nothaft commented. “The result is an economy that gradually recovers back toward its potential.”