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Pick Up in Economy During Second Half

Chief Economist Frank E. Nothaft

The economy hit a soft patch during the spring, buffeted by rising energy costs and heightened economic uncertainty. Economic growth should pick up in the second half of the year, supported by accommodative monetary policy, restoring stronger monthly job gains and bringing the unemployment rate down toward 8.6% by the fourth quarter.

Homebuyer affordability remains very high, driven by the twin forces of low financing costs and a buyer's market. Mortgage interest rates have gradually moved lower for most of the spring, with fixed-rate loans just slightly above the half-century nadir attained last fall and likely to remain in a 4.5% to 5.0% range for 30-year product over the balance of the year. Likewise, U.S. house price indexes moved lower during the first quarter, helping set the stage for a high degree of purchasing power for home seekers.

Low Interest Rates & Home Prices Have Increased Homebuyer Affordability
Low Interest Rates & Home Prices Have Increased Homebuyer Affordability

With that as a backdrop, why aren't home sales more vigorous? Partly because consumers are a worried group today. The latest Conference Board measure of consumer confidence declined in May, in part reflecting concerns over waning job creation and rising energy costs. Consumers who feel heightened uncertainty over their economic well-being are more likely to be cautious when considering purchases of big-ticket items, such as homes. Further, the first-quarter data on U.S. house-price softness has removed a catalyst to immediate action: Some potential buyers who have the means to buy are awaiting clearer signs that home values have firmed.

The consumer is not the only economic agent brooding over the uncertain outlook. Small businesses are also concerned about the vitality of future demand for their products. The National Federation of Independent Businesses' economic confidence index declined for the third consecutive month in May and remains at levels reflecting a bearish near-term outlook. Firms will be hesitant to add workers if worried about prospects for sales growth. One industry that remains particularly depressed is home building. The National Association of Home Builders/Wells Fargo Housing Market Index of builder sentiment remains mired at historically low levels; the June value was 13 on a scale where values below 50 indicate a negative assessment of demand.

The rental sector is a bright sign in today's housing market. The National Multi Housing Council reported a tightening in rental markets and greater availability of equity and debt financing. Accordingly, it released an upbeat Market Tightness Index of 90 as of April – the highest recorded in the 12-year index history (values above 50 represent a tightening of the market). Consistent with this evaluation, rental vacancy rates in buildings with at least five apartments have steadily drifted lower over the past year, and monthly rents have risen over the past year.

Thus, even though near-term concerns over income and sales growth are restraining consumer spending, business hiring, and new building, a number of positive signs in the economy indicate that growth will continue and is likely to accelerate in the second half of this year. And while parts of the housing industry remain weak, the rental market has clearly strengthened and home sales are above last year's pace. Look for a gradual improvement in housing activity in the coming year.

* Frank Nothaft left his position with Freddie Mac in January 2015


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