Freddie Mac cited a number of positive opportunities for housing to start 2015, but households and businesses should take advantage of them because those opportunities may be limited, according to the GSE's January 2015 U.S. Economic and Housing Market Outlook released on Tuesday.
Among the positive tailwinds for housing to start the year are the refinancing opportunities available. Among conventional 30-year fixed mortgage agency mortgage-backed securities (MBS), $361 billion had a 4.5 percent coupon and another $479 billion had a coupon higher than 4.5 percent. Many of those MBS had a rate higher than 5 percent, giving borrowers a strong incentive to refinance at the current 30-year fixed annual rates, which averaged a below-expected 4.17 percent in Freddie Mac's latest Primary Mortgage Market Survey.
The most important positive tailwind for housing, however, is job growth. Payrolls increased by an average of 246,000 per month in 2014 compared to just 194,000 per month in 2013, according to the Bureau of Labor Statistics. The unemployment rate fell by the course of 1.1 percentage points during the course of 2014 down to its latest reported rate of 5.6 percent for December, the lowest level it has been in six and a half years. The drop in unemployment rate over 2014 reduced the amount of unemployed persons in the United States by 1.7 million, according to BLS.
It was not such a positive year for wage growth, however, as wages increased by only 1.7 percent, barely keeping up with inflation, according to BLS. However, the latest Conference Board Consumer Confidence Index in December reported the highest level of consumer confidence since February 2008. Lower gas prices have also given American consumers anywhere from a $125 to $200 billion stimulus, according to economists' estimates.
"On balance there are a lot of positive opportunities in the U.S. economy at the start of the year, and the real question is whether or not households and businesses will be able to seize these opportunities and make the most of them," said Frank Nothaft, Freddie Mac VP and chief economist. "The reprieve in interest rates and drop in gas prices should help to spur economic growth. Until rates start to rise later in the year, housing markets should respond positively and we anticipate increases in home sales and continued improvement in construction activity. With rates lower at the beginning of the year, we'll see higher than expected refinance volumes as well."
The report stated that households and businesses should take advantage of these positive opportunities now, because they may not last. Unexpected weakness in the global economy and uncertainty in foreign markets has resulted in a flight to the relative safety of the U.S. Treasury, which in turn has resulted in lower mortgage interest rates and gas prices as well as a drop in inflation domestically.
"Over time the global economy should stabilize and many of these trends may reverse themselves," Nothaft wrote in the report. "In addition, domestic economic policy, particularly by the Federal Reserve, has the potential to affect interest rates. We expect to see the relatively low interest rates of the past few weeks persist for the first two quarters of the year, but then start to move higher in the second half."
The refinance share has been adjusted higher by 9 percent due to lower-than-expected mortgage rates, according to Freddie Mac. Much of the increase in refinance share can be attributed to the spike in refi activity.
"The economy has a great opportunity to expand in 2015," Nothaft wrote. "The reprieve in interest rates and drop in gas prices should help to spur economic growth. Until rates start to rise later in the year, housing markets should respond positively and we anticipate increases in home sales and continued improvement in construction activity. With rates lower at the beginning of the year, we’ll see higher than expected refinance volume, but expect refinance volume to drop quickly as rates rise."