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First Half Bipolar Housing Market Clouds Rest of Year Outlook

Multifamily Carrying Sector Into Recovery
August 5, 2014
The past couple of weeks have produced some conflicting housing outlooks and monthly reports.

In one case, Freddie Mac is projecting that new housing construction will increase about 14% in 2014 compared to 2013. That is followed by a report released by the Commerce Department that new home sales dropped 8.1% in June, marking the largest decline in more than a year.

Then Freddie Mac predicts home sales to play catch up after a disappointing first part of the year and accelerate for the remainder of the year.

Housing sales for June appeared to support that. Sales of existing homes in June were 5.04 million, up 2.6% for the best number in eight months, according to the National Association of Realtors, although the number of pending home sales fell 1.1% in June, after a 6% rise the month prior. Year over year, pending home sales remain in the red, down 4.5%.

According to results released by Fannie Mae from its July 2014 National Housing Survey, attitudes among home buyers and sellers remain mixed, although continued improvement in Americans' personal financial outlook may bode well for housing in the coming months.

"The continued cautious sentiment expressed across the range of consumer indicators this month gives weight to our view that the first phase of the housing recovery is decelerating, and 2014 will be a year of mixed housing outcomes with home prices rising more slowly and home sales falling slightly," said Doug Duncan, senior vice president and chief economist at Fannie Mae.

Duncan cited recent data showing that more than 200,000 jobs has been created over each of the last six months, combined with this month's improvement in the share of consumers reporting significantly higher household income than a year ago, should give the housing market a dose of optimism.

"If these trends continue, they could lead to some upside in housing in 2015," he noted.

The mix of results has cooled the housing price gains seen last year. Data through May 2014, released by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices, show home prices increased at a slower pace. The 10-City Composite gained 9.4% year-over-year and the 20-City 9.3%, down significantly from the +10.9% and +10.8% returns reported last month. All cities with the exception of Charlotte and Tampa saw their annual rates decelerate.

"Home prices rose at their slowest pace since February of last year," said David M. Blitzer, chairman of the Index Committee at S&P Dow Jones Indices. "Housing has been turning in mixed economic numbers in the last few months. Prices and sales of existing homes have shown improvement while construction and sales of new homes continue to lag. At the same time, the broader economy and especially employment are showing larger improvements and substantial gains."

Mortgage expert Don Frommeyer says the numbers are misguided and when properly explained, a volatile housing market is logical.

“The housing market is heavily related to the status of the overall economy. Economists are stating that unemployment is at an 8-year low, but the number is flawed and is not taking into account those unemployed who fell off of the unemployment benefits record, said Frommeyer president of NAMB (The Association of Mortgage Professionals). “People have simply stopped looking for new jobs. For the housing market to continue improving, we need more job creation, not just lower unemployment numbers.”

Frommeyer continues to explain that the prolonged period of weak employment is unfamiliar to economists and is leading to an unemployment overhang.

“People have given up on the economy and we need to pull them back into the search for employment numbers to be accurate. I wouldn’t be surprised if economists start to revise their rosy numbers for something more practical. When and if they do, the relation to weak housing numbers will be more obvious,” Frommeyer said.

Lindsey M. Piegza, chief economist for Sterne Agee, said the bottom line is that housing activity has slowed markedly at the end of Q2.

“Going forward, housing demand will depend on subsequent job and income growth. Labor market gains while positive, have centered around part-time, temporary and low-wage employment, insufficient to spark wage pressures,” Piegza said. With home prices still rising rapidly, far outpacing income growth, many potential home buyers remain sidelined, unable to afford a home purchase.”

Declining Health Care Spending an Ill Wind for the Economy

According to Fannie Mae's Economic & Strategic Research (ESR) Group, the economy experienced the worst performance in five years during the first quarter of 2014, due in large part to a significant downward revision in health care spending.

And incoming data suggest only a moderate pickup in growth for the second quarter - likely resulting in an essentially flat first half of the year.

"Our findings in the July forecast suggest that full-year growth in 2014 likely will be weaker than 2013," said Fannie Mae chief economist Doug Duncan. "We expect the economy to grow approximately 3% in the second half of the year, although there is an element of uncertainty given government statisticians' difficulty in assessing the full scope of health care expenditures."

"Housing data point to a continued but modest rebound in the housing market, in line with our prior forecast," said Duncan. "Recent housing activity picked up seasonally as we expected, yet many indicators remain near or below the levels for the same period last year.”

“For all of 2014, we continue to expect total home sales to decline about 2% and total mortgage originations to decline approximately 41%,” Duncan said.

Thank Goodness for Multifamily

The one certainty in the housing market right now is that multifamily continues to carry the load.

Housing starts for 2014 are forecast to be 1.05 million dwellings with multifamily accounting for about one-third, according to Freddie Mac.

"The multifamily rental market has led the rest of the housing sector into recovery, and about one-third of housing starts in the first quarter were for multifamily rental apartments,” said Frank Nothaft, Freddie Mac vice president and chief economist for Freddie Mac. “There's no question the single-family recovery is moving slowly, but it continues to doggedly press forward and we are cautiously optimistic."

According to Freddie Mac, supply of new multifamily units is being absorbed by demand and market fundamentals are expected to remain strong over the next two years, converging towards historical averages. ver the next decade, an estimated 440,000 multifamily units may be needed each year to meet the growing demand, based on demographic trends.

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