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Opinion, commentary and analysis on everything that makes the U.S. housing economy tick -- not to mention the ghosts in the machine, too. Written by HW's team of editors and reporters each business day.
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Economist: 3 major things you need to know about the 2014 housing market

Mortgage availability may improve?

March 17, 2014
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The following list was put together by a veteran housing economist, asked by HousingWire for his opinion on the near-term future of the markets we cover daily.

Here's David Berson's take on the 3 things you need to know about housing in 2014.

No. 1: 2014 should prove to be the strongest year for housing activity since before the Great Recession.

Housing activity (home sales and housing starts) has increased modestly over the past several years, but is still at levels well-below sustainable trends. For both economic and demographic reasons, 2014 should be the year when activity reaches the highest level since 2006/2007.

Propelling home sales are job growth and housing affordability. The latter reflects the interplay of household income, mortgage rates and house prices. In 2013, while housing activity picked up, it was a year when job growth remained low and virtually unchanged from the previous year.  Moreover, affordability, while still high, fell sharply in the second half.

Most economists expect an improved job market in 2014, with employment growth accelerating and the unemployment rate continuing to decline. That jobless rate drop will reflect more of a pickup in employment than further declines in the labor force participation rate. This will be the key factor improving housing demand this year, even if mortgage rates rise and affordability declines. While the housing market tends to do especially well when the job market improves and mortgage rates decline simultaneously, that combination of events occurs only rarely.

More often, either job gains accelerate while mortgage rates rise, or job gains decline while mortgage rates drop. Typically, housing activity expands in the former case and contracts in the latter. People buy homes when their job and income prospects improve – even if it’s more expensive to do so – rather than buy when it is inexpensive to do so but they’re worried about keeping their jobs.

No. 2: Demographics should start to favor housing activity.

The demographic factor most affecting the housing market is household formations. Newly formed households may buy or rent, but they reside somewhere as an independent unit. On average, roughly 1.2 million households form every year in the United States and they each demand a housing unit. Household formations are affected by the job market, as people “double-up” when worried about their job and income-earning prospects. The Great Recession and the modest job recovery in the years following induced many people who might have lived independently to move in together. That’s most noticeable in the rise in the share of young adults living with their parents, primarily because of the weak job recovery.

Reflecting the slow pace of household formations, there is an increasing pent-up demand for households. After all, most of these young adults would prefer the freedom of being on their own (and their parents really don’t want them as full-time residents, either). We estimate the economy is short by more than three million households.

If the economy expands at a faster pace this year, bringing a more rapid rate of job creation, that should translate into more households, raising housing demand. We won’t see all three million missing households return to the housing market at once. (That wouldn’t be a good thing for the housing market anyway, since that would be on top of the 1.2 million households that normally would develop this year; such a surge would swamp the existing housing supply). Beginning in 2014, the pace of household formations should accelerate to an above-trend pace for several years, pushing up housing demand.

No. 3: Mortgage availability shouldn’t worsen and may improve.

Mortgage credit isn’t nearly as easy to get as it was during the housing boom, and it shouldn’t be.  Still, compared with recent years, mortgage availability has increased slightly. And reasons exist for mortgage availability to be no worse in 2014 than in the past few years. Actually, it may be somewhat easier to get a mortgage loan.

With the dislocations in mortgage lending since the housing bubble popped, Fannie Mae and Freddie Mac have increased their share of the mortgage market significantly. When combined with lending from the Federal Housing Administration and the Veteran’s Administration, the government or government-sponsored share of mortgage lending has climbed to more than 90 percent in recent years. That is an untenable situation in the long run, but is unlikely to change much this year.

The good news is that new Qualified Mortgage lending rules from the Consumer Financial Protection Bureau exempt home mortgages that qualify for purchase or securitization from Fannie and Freddie. As a result, mortgage lenders won’t have to tighten their mortgage-underwriting requirements in response to QM as long as they sell their loans to the GSEs.

Additionally, the rise in mortgage rates already has reduced mortgage origination volumes as refinance activity declines. If mortgage rates rise further this year, as expected, then refinance activity will fall still more. In response, mortgage lenders probably will ease lending standards to the extent possible under the QM rules to boost lending activity by increasing purchase originations. As a result, the increase in new households expected to be created this year, spurred by a stronger job market, should find that qualifying for a mortgage loan will be somewhat easier in 2014 than in prior years.