Housing and the Economy: A Forecast for 2014

The BPC Economic Policy Program hosted a panel discussion on Thursday, January 30 with three prominent economists who shared predictions on the state of the U.S. housing market in 2014. Richard Smith, BPC Housing Commissioner and CEO of Realogy Holdings Corp., moderated the forum.

Housing had a strong rebound in 2013, with total annual growth in residential fixed investment at 12%. Growth in residential investment contributed almost one-sixth of total economic growth, despite being less than one-twentieth of the total economy. Smith pointed out that overall economic activity driven by housing is a much larger share of the U.S. economy than suggested by the residential investment indicator—almost 20 percent—and is a key driver of future growth. The panelists discussed how the most recent data for the fourth quarter were depressed, likely due to unusually bad weather. The question they grappled with is: Where do we go from here?

Smith asked the panelists which trends—economic, demographic, or policy—most influence their forecast for where the housing market is headed in 2014. Beth Ann Bovino, U.S. Chief Economist for Standard & Poor’s, acknowledged that economic factors like job growth, increases in household net worth, and the strengthening of the stock market lend to an optimistic view, but are countered by challenges on the demographic front. Most notably, many of those in the “starter-home” age bracket are not entering the market because they are either in school or saddled with student loan debt. Mike Fratantoni, Chief Economist at the Mortgage Bankers Association, noted that lenders are peeling back product options like adjustable rate or interest only loans in response to the recent Qualified Mortgage (QM) rule. He argued that this policy-triggered trend, over the long-term, will leave borrowers with fewer options and less flexibility to move between products. Lawrence Yun, Chief Economist with the National Association of Realtors, viewed 2013 as a good recovery year that, despite ending softly in the fourth quarter, left 2014 in a solid place to continue improving.

While home prices nationally rose by 20% over the past two years, uneven income growth has led to a bifurcated housing market with a booming jumbo market and sluggish first-time buyer demand. When asked what is likely to happen to home prices over the next year, Bovino predicted 6% year over year growth, Fratantoni foresees 4%, while Yun’s forecast split the difference at 5% price growth. The panel agreed, however, that there will continue to be incredible variation across markets.

Notable takeaways from the discussion:

• Industry groups are closely watching the impact the recent QM rule will have on interest rates.
• A general consensus that the national homeownership rate will eventually settle around 65%.
• The housing market may take an additional 3 years to return to its pre-crisis level.
• The aspiration to own a home has stayed strong among young people and even among those who experienced a foreclosure.
• The 30 year fixed rate product is very popular and it is hard to imagine housing finance reform legislation that can be enacted into law that does not also maintain this product.

Watch the panel discussion here.