The housing market is starting to regain normalcy and housing fundamentals will once again drive the market, according to the latest Freddie Mac housing report.
“The economic growth and labor market gains we saw in the second quarter of this year are projected to continue, strengthening household formations and the housing sector. A recovering housing sector will sustain the rally in homebuilding despite likely increases in long-term interest rates,” Frank Nothaft, Freddie Mac vice president and chief economist, said.
“Increased construction activity will further accelerate the improvement in labor markets and fuel even more household formations and more housing demand. The result is an economy that gradually recovers back towards its potential," he continued.
The positive report hinged on these four facts:
1. The labor market
The labor market is steadily picking back up, adding 230,000 new jobs on average for the first seven months of this year.
However, while it is improving, the growth might not be in the best places.
According to the most recent jobs report, full-time jobs rebounded modestly, rising by 285,000 in July following June's 523,000 collapse, which was only made up for by part-time job growth of 779,000,
2. Household formations
According to Freddie Mac, the U.S. Census Bureau reported that over the past four quarters, net household formations totaled only 458,000, compared with long-term projections by the Joint Center for Housing Studies of 1.2 to 1.3 million per year.
In addition, the number of persons per household has increased by 2.6% since 2005, moving from 2.69 to 2.76 persons per household.
3. Home affordability
The monthly mortgage payment-to-rent ratio for the U.S. is near the lowest it has been in more than 35 years. Despite some increases in house prices and interest rates, the ratio is projected to remain relatively low.
4. Economic growth
Latest forecast has economic growth averaging 3.3% in 2015 and the unemployment rate continuing to gradually decline.
As a result, household formations should pick up and housing starts are projected to increase 28% over 2014's pace to 1.3 million starts in 2015.