Mortgage

Freddie agrees with Fannie: The economy is improving

Freddie Mac outlook indicates mortgage debt will increase in 2015

Earlier Tuesday, a report from Fannie Mae showed that the U.S. is experiencing a moderate rebound in economic growth during the second quarter driven by continued strengthening in employment and household income.

A new report from Freddie Mac echoes that sentiment and suggests that improving household balance sheets will make it more enticing for Americans to take on mortgage debt in 2015.

Freddie Mac released its U.S. Economic and Housing Market Outlook for June, which cited low debt servicing costs in addition to improving household income as signs that mortgage debt is set to increase.

"Low mortgage rates and years of debt consolidation have led mortgage servicing costs as a share of disposable income to the lowest levels we've seen in decades,” Freddie Mac Deputy Chief Economist Len Kiefer said.

“After many fits and starts, the data finally show that not only are more Americans taking out a mortgage to purchase a home, but that total outstanding debt on single-family properties has increased on a year-over-year basis,” Kiefer continued. “This is yet another sign the economy, and housing markets, are pivoting toward normalcy."

According to Freddie Mac’s report, the following developments are expected:

  • Expect single-family mortgage debt outstanding to increase in 2015. As house prices increase, home sales increase, and as the cash share of home sales declines, single-family mortgage debt outstanding growth should accelerate in 2016 and 2017.
  • Based on analysis of loans funded by Freddie Mac, in normal times the resale of an existing home results in an increase in aggregate mortgage debt of about 30% with each new home purchase loan. As of the first quarter 2015, the increase in aggregate mortgage debt is back to this long-term average.
  • With mortgage debt set to increase, the market is going to have to find a home for the additional debt. The Federal Reserve currently holds $1.7 trillion of agency mortgage-backed securities. And new debt issuances, such as Freddie Mac's Structured Agency Credit Risk offerings will become increasingly important over the next few years, and will help to find a home for new mortgage debt.
  • Despite the increased demand, don't expect the homeownership rate to increase. Demographics will continue to trump demand. As the labor market continues to improve, millions of additional households and homeowners will be added to the economy, but homeownership rates are likely to keep falling this year.

"This is good news and will present mortgage, housing and capital markets with new opportunities,” Kiefer said. “Going forward we'll see a slow shift from Boomers as the dominate cohort in housing to the Millennials, who are just now entering prime homeownership years and unleashing further pent-up demand."

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