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Household Formations, Housing Starts to Increase Next Year: Freddie Mac

AUG 25, 2014 1:09pm ET
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Freddie Mac expects housing demand and supply to increase through next year as the economy gradually returns to normalcy.

One of the biggest factors that will motivate U.S. consumers to purchase a home is their employment situation. After several years of weakness, the labor market is starting to improve adding 230,000 net new jobs on average for the first seven months of 2014.

Meanwhile, stronger economic growth and job creation results in rising family incomes. For example, a 5% increase in income will elevate homebuyer affordability by 12%, Freddie Mac said.

Currently, housing affordability is strong in most parts of the country. The 30-year fixed-rate mortgage averaged 4.23% in the second quarter, down 13 basis points from the previous quarter, the Washington-based trade group said.

Additionally, Freddie is projecting only a 0.8 percentage point rise in the 30-year fixed mortgage rate by the end of next year.

"Our latest forecast has economic growth averaging 3.3% in 2015 and the unemployment rate continuing to gradually decline," said Frank Nothaft, Freddie Mac's chief economist.

"In this scenario, household formations should pick up and housing starts are projected to increase 28% over 2014's pace to 1.3 million starts in 2015."

Despite low mortgage rates and improvement in the labor market, household formation still remains slow nationwide. The Census Bureau reported that over the past four quarters, net household formations totaled 458,000, compared with long-term projections of 1.2 million to 1.3 million per year by the Joint Center for Housing Studies.

Furthermore, the number of persons per household has elevated by 2.6% since 2005, going from 2.69 to 2.76 persons per household.

However, if the number of people living in a house held steady over the last nine years, Nothaft said there currently would be an additional 3 million homeowners. He believes that these "missing" households will appear over the next couple of years because of today's labor market conditions as well as more consumers beginning to make transition from being renters to homeowners.

Nothaft said this transition is likely to happen because the monthly mortgage payment-to-rent ratio is the lowest it has been in more than 40 years. Therefore, even if home prices continue to rise and interest rates increase, the ratio will still remain relatively low.

"One challenge for households seeking to transition from tenancy to ownership is amassing the funds for the down payment and closing costs. A stronger economy should provide a growing number of households the savings necessary for ownership in the future," Nothaft said.

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