Analysts Predict Continued Improvement for Housing as Economy Strengthens in 2015

With only weeks left before 2014 comes to a close, many economic commentators are already looking to what next year could bring—including Frank Nothaft and Len Kiefer, chief economist and deputy chief economist at Freddie Mac.

In the company's latest Economic and Housing Market Outlook for the United States, the two analysts turn their attention away from 2014—a mixed year for housing, especially compared to 2013—and toward 2015, which they say will see continued strengthening in the market for home purchase mortgages as the economy improves on a broad basis.

Looking at the larger economic picture, the economists predict a 3 percent growth rate for gross domestic product (GDP) in 2015, which would mark only the second year in the past decade in which growth was at 3 percent or higher.

Also among the pair's predictions for 2015:

• Interest rates will climb further: Having started the year off at 4.53 percent, mortgage interest rates spent the year's opening months falling into the low 4 percent range before climbing throughout the summer and eventually dropping again. With yields on the 10-year Treasury expected to average 2.9 percentage points next year, the average 30-year fixed rate is forecast to gradually rise throughout the year, ending around 5 percent.
• Home price gains will slow even more: While price growth is expected to continue, it will come at a more moderate pace, Freddie Mac's economists say. The company's current projection is for prices to rise 3.0 percent in 2015 compared to 2014—down from 4.5 percent anticipated for this year and less than one-third the increase seen in 2013. While ongoing price gains will dampen affordability somewhat, the analysts don't see it as a major concern: "Historically speaking, that's moving from very high levels of affordability to high levels of affordability."
• Home sales and housing starts will accelerate: Sales and new construction are the two areas where the housing market has disappointed this year, but that's expected to improve. Freddie Mac predicts total housing starts will increase by 20 percent from 2014 to 2015, with single-family homes accounting for most of that pickup. Meanwhile, total home sales are expected to increase by about 5 percent over the year, marking the best sales pace in eight years.
• Home purchase mortgages will gain even greater share... but total originations will fall: Refinance originations are anticipated to account for only 23 percent of 2015's loan volumes, coming down hard off the surge of recent years. Meanwhile, purchase lending is expected to fall short of filling that gap, resulting in an 8 percent annual drop in originations to $1.1 trillion.

"Government fiscal drag has turned into fiscal stimulus, lower energy costs support consumer spending and business investment, further easing of credit conditions for business and real estate lending support commerce and development, and more upbeat consumer and business confidence, all of which portend faster economic growth in 2015," Nothaft said of the forecast. "And with that, the economy will produce more and better paying jobs, providing the financial wherewithal to support household formations and housing activity."