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August 25, 2014

4 Signs the Economy Is Gradually Returning to Normal

Frank E. Nothaft
Frank E. Nothaft, VP Chief Economist

Freddie Mac's latest U.S. Economic and Housing Market Outlook concludes that the nation's economy is gradually getting back to a more normal level of activity, and therefore we expect to see housing demand and supply increasingly driven by fundamentals – in fact, we've already seen this in some markets.

Four areas in particular are worth noting:

  • After several years of weakness we are starting to see the labor market pick up steam having added 230,000 net new jobs on average for the first seven months of this year. However, despite these recent improvements, household formation still remains very slow. The Census Bureau reported that over the past four quarters, net household formations totaled only 458,000, compared with long-term projections by the Joint Center for Housing Studies of 1.2 to 1.3 million per year.
  • The number of persons per household has increased by 2.6 percent since 2005, going from 2.69 to 2.76 persons per household. If the persons per household had held steady over that period there would be an additional 3 million households today. Those 3 million “missing” households are likely to show up over the next couple of years, especially if recent labor market trends persist. They’ll require a place to live – new households generally begin with an apartment in the rental market, but over time, the majority of those additional renter households will likely transition to homeownership.
  • The monthly mortgage payment-to-rent ratio for the U.S. is near the lowest it has been in more than 40 years. Thus, even with some increase in house prices and interest rates, the ratio will remain relatively low. One challenge for households seeking to transition from tenancy to ownership is amassing the funds for the down payment and closing costs. A stronger economy should provide a growing number of households the savings necessary for ownership in the future.
  • Our latest forecast has economic growth averaging 3.3 percent in 2015 and the unemployment rate continuing to gradually decline. In this scenario, household formations should pick up and housing starts are projected to increase 28 percent over 2014’s pace to 1.3 million starts in 2015.

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.

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