The December employment report was ugly – only 74,000 new jobs added for the month. That was well below the 180,000 analysts were expecting, the slowest rate in three years, and a reversal in what had seemed to be a steadily (if slowly) improving employment picture. The unemployment rate declined to 6.7 percent, reaching its lowest level in more than five years. But the improvement came at least in part because discouraged job-seekers have given up.
Analysts are still trying to explain the setback – whether it can be attributed to seasonal patterns, unusually cold weather (the polar vortex), cosmic rays or other random factors unrelated to economic fundamentals, and thus dismissed as a blip in an otherwise positive upward trend. Or whether, as some analysts fear, the disappointing report reflect more serious problems that will continue to produce anemic employment numbers, and a lackluster economic performance, this year.
We’ll give the experts time to sort that out. In the meantime, instead of focusing on the employment picture (It is the beginning of the year, after all, and who wants to start out with bad news?) we’ve compiled some forecasts for what this year is likely to bring for the economy generally and for housing in particular. We haven’t ignored the ‘cause for concern’ forecasts, but (spoiler alert) you will note that we’ve emphasized the more positive ones.
Economic Growth
The economic growth rate (GDP) jumped unexpectedly in the third quarter, rising from 3.6 percent to 4.1 percent, leading some economists to conclude that the recovery is poised to move into high gear. “The economy is getting ready to kick it up a notch,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, told Bloomberg News. “This is the better tomorrow we’ve been waiting for,” he added.
Growth predictions for this year range from moderate to much better than that. The Federal Reserve is predicting a somewhat lackluster 3 percent annual growth rate, consistent with former Fed Chairman Ben Bernanke’s view that the “economy has much farther to travel before conditions can be judged normal.”
But Eugenio Aleman, senior economist at Wells Fargo Securities, thinks consumers are becoming more confident, suggesting (in a Reuters interview) that “income and spending will rise more quickly over the coming year as the labor market and consumer confidence strengthen further."
Marketwatch is predicting that growth will be in the 2.5 percent to 3 percent range anticipated by the Fed, but also sees the possibility that “it could surprise on the upside.”
Inflation may also surprise on the up side, Peter Muoio, chief economist for Auction.com, has warned, getting close to the Fed’s 2 percent target and putting modest upward pressure on wages and consumer prices.
Employment
The December report did not bode well but the Fed is predicting that the unemployment rate could fall further – to 6.3 percent – this year. HIS Global Insight is predicting a 6.5 percent rate this year, falling to 5.2 percent over the next three years. It would obviously be much better if the decline comes because employers are adding jobs rather than because discouraged workers are abandoning hope of finding them.
Housing Market
Auction.com’s Muio expects the housing recovery to continue this year, but with less help form investors and more support from owner-occupants. “Even if mortgage rates edge a little higher, the recovery in housing market activity should continue,” Capital Economics concurred in its annual forecast. Some analysts are predicting a boost from “boomerang buyers,” who lost their homes to foreclosures or short sales during the downturn, but are ready and able to re-enter the market now.
The National Association of Realtors (NAR) expects home sales this year to match the 2013 total (about 5.1 million units), with improved inventory levels easing the upward pressure on home prices and cooling overheated markets. Redfin CEO Glenn Kelman expects fewer bidding wars and generally “less frenetic” conditions in recovering markets.
Almost everyone seems to agree that home price appreciation rates will slow. Zillow is predicting an annual increase in the 3 percent to 5 percent range; housing economist John Burns predicts a more robust 6 percent gain. In any event, most analysts seem to agree, a generally positive price trend will pull more under water borrowers above the negative equity line, allowing more previously sidelined owners to sell their home, with positive effects on inventory levels, home sales and the economy.
Interest Rates
The likely direction will be up, as the “tapering” of the Fed’s bond-buying program removes the stopper that has kept interest rates bottled up for the past two years. “The question is not if rates will rise, but how far and how fast,” columnist Steve Cook suggested on Real Estate Economy Watch.com. The more specific question is whether higher rates will ding the economy generally and the housing market in particular.
Lawrence Yun, the NAR’s chief economist, expects the 30-year mortgage rate to hit 5.5 percent by the end of the year; Erin Lantz, head of mortgages for Zillow, thinks rates will top out at 5 percent – up sharply from the 3.8 percent low reached during the downturn, but still low by historical standards, and low enough, Lantz believes, to keep home buying costs well within the affordable range for prospective buyers.
Glen Kelman, CEO of Redfin, agrees. “Before the Fed’s 2008 decision to buy $85 billion in debt per month,’ he noted, “the 36-year average [mortgage rate] 9.2 percent. It was never below 5.8 percent [during that period.]”
Credit Availability
While most analysts are expecting home sales to be steady, if not stellar, this year, Auction.com analyst Rick Sharga warns, “It is easy to build a scenario that goes terribly wrong.” His major concern – and what may be the largest variable in housing forecasts – the impact of new mortgage lending rules. The combination of higher – even slightly higher – mortgage rates and tighter credit standards, Sharga and other industry analysts fear, will significantly reduce the number of borrowers able to qualify for loans, cutting a large chunk of demand out of the supply-and-demand equation.
Cameron Findlay, chief economist for Discover Home Loans, estimates that between 10 percent and 12 percent of existing loans would not comply with the new “Qualified Mortgage” guidelines. Even if that number is closer to the 5 percent regulators have predicted, Findlay told reporters, “that is still a huge number of people” who will be closed out of the housing market.
Ian Shepherdson, chief economist with Pantheon Macroeconomics, also sees cause for concern. With mortgge rules tightening credit and mortgage rates “likely to hit new cycle highs over the next few months,” he wrote in a note to clients, “we think the chance of a serious housing market retrenchment is higher than the Fed might care to admit.”
Other analysts think lenders and borrowers will adjust to both the new mortgage rules and a higher interest rate environment.
“The silver lining to rising interest rates is that getting a loan will be easier,” Zillow’s Erin Lantz told Forbes. “Rising rates means lenders’ refinance business will dwindle, forcing them to compete for buyers by potentially loosening their lending standards.” At least some lenders have indicated that they will be willing to originate and hold in their portfolios loans that do not meet the “qualified mortgage” standards and can’t be sold in the secondary market.
For buyers, relief may come in an improving job market, which would boost incomes, buying power and consumer confidence. Economist Nicholas Retsinas, a senior lecturer at Harvard Business School, acknowledges that rising rates could undermine the economic recovery, employment prospects and the outlook for housing. But he’s betting on the recovery. “Generally, where there is tug of war between jobs and interest rates,” he told Forbes, “jobs win.”
