2014: The year of purchase mortgages, rising rates

Headwinds remain in the form of government uncertainty, unclear Fed policy

With 2013 almost over, economists are looking into their crystal balls and predicting a purchase-driven mortgage market for 2014.

Not to mention, ongoing home affordability is expected to rise in most areas despite rising mortgage rates.

All of these trends were predicted in Freddie Mac's latest Economic and Housing Market outlook.

"With the close of 2013 will also come a major transition in the housing finance industry," said Frank Nothaft, Freddie Mac's chief economist and vice president. "For the first time since 2000, we're going to see the mortgage market dominated by purchase activity as the refinance share drops below 50%."

"And with mortgage rates rising, we're also going to see the home sales gains as well as the impressive house price growth begin to moderate to more sustainable levels," he added.

U.S. economic growth is projected to increase 2.5% to 3.0%, which is 0.5 percentage points higher than the initial 2013 estimate.

Meanwhile, Freddie Mac expects interest rates to steadily rise throughout 2014, with the 30-year, fixed-rate mortgage ending the year near 5%.

Still, even with higher rates, affordability is expected to remain strong in most markets, with high-priced areas serving as the only exception.

Housing starts are projected to rise to a pace of 1.15 million units next year. A situation that will in turn create roughly 700,000 new construction jobs, the GSE said in its forecast.

Home sales will remain somewhat restricted by tighter inventory in many markets, with sales expected to rise about 5% to 6% from 2013 to 2014, Freddie added.

Borrowers also will experience some positives in 2014, with home values continuing to rise at a more moderate pace of 5% to 6%.

Orawin Velz, an economist with Fannie Mae, believes the refinance market on average will make up 40% of all originations in 2014.

Still, predicting exact outcomes for the market is impossible. Uncertain Fed policy and government negotiations over the budget and debt ceiling could disrupt economic activity in the first part of the year.

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