A pick-up in the economy is expected to help propel the housing market forward, with an increase in household formation and a stronger recovery, according to Freddie Mac’s Economic and Housing Market Outlook for August.
“We are getting closer to a more normalized economy, and now we are expecting to see housing driven by fundamentals, and, in fact, we’ve already seen this in some markets,” says Frank Nothaft, Freddie Mac’s chief economist.
“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. 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 toward its potential.”
The labor market has added 230,000 net new jobs during the first seven months of the year, the first solid improvement after several years of weak employment.
Over the past four quarters, net household formations totaled 458,000, according to Census Bureau data. But the Joint Center for Housing Studies is projecting that to jump 1.2 million to 1.3 million per year in the long-term.
The number of persons per household has risen by 2.6 percent since 2005, from 2.69 to 2.76 persons. “If the persons per household had held steady over the period, there would be an additional 3 million households today,” according to Freddie Mac’s report.
Freddie Mac also reports that the monthly mortgage payment-to-rent ratio is near the lowest it has been in more than three decades. “Even with some increases in house prices and interest rates, the ratio will remain relatively low,” according to the report.
The economy is expected to continue growing, which will likely help to lift the housing market, according to the report. Economic growth is expected to average 3.3 percent in 2015, and the unemployment rate is expected to continue gradually declining. If this occurs, household formations are projected to increase, and housing starts are projected to rise 28 percent over 2014’s pace to 1.3 million starts in 2015.