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Freddie Mac outlook predicts affordability, less refi activity in 2014

The average American market has remained relatively affordable, and Freddie Mac analysts believe that will continue as long as any Fed tapering coincides with an increased rate of new construction.

Freddie Mac's most recently released U.S. Economic and Housing Market Outlook predicts that, despite high property values in many metro areas and the potential for mortgage rates to spike, the market will remain generally affordable in 2014.

Freddie's latest report was titled "2014: The Emerging Purchase Market." It details the anticipated transition away from refinance activity and toward increased purchase business. Among the primary issues to be addressed is securing responsible mortgages for prospective homeowners within a marketplace where demand currently exceeds supply and the pending Qualified Mortgage rule figures to make efficient underwriting more important than ever, HousingWire reported.

Time of transition
In the report, the government-sponsored enterprise called for mortgage interest rates to rise to 5 percent by the end of 2014, a prediction based primarily on the expectation that the Federal Reserve's $85 billion-per-month bond-buying program will be tapered during the first half of the year. While Fed officials have offered no specific timetable - and all prognostications are therefore entirely speculative - the long-held precursors to a reduced rate of spending have included continued employment growth and evidence of enhanced overall economic stability. The October jobs report provided some of the former, and Freddie's predictions for 2014 include more of the latter.

As such, even with the anticipated rise in interest rates, the GSEs are maintaining an optimistic outlook for the market's overall direction. While prices have skyrocketed on the high end - particularly in Boston, Los Angeles, New York and San Francisco, among others - the average American home has remained relatively affordable, and Freddie Mac analysts believe that will continue as long as any Fed tapering coincides with an increased rate of new construction.

Throughout 2014, new home starts have gradually maintained a level of growth, but continue to lag behind the rate of demand present in a housing market where inventory is still tight. If 2014 brings more construction projects, that will mean more available housing for what appears to be a ready buying market, and also more jobs and more widespread economic viability. Building new homes, therefore, is perhaps the single most important facilitating factor within the housing finance industry because of its multifaceted ripple effect.

"[New home] starts have ratcheted up to about a 900,000-unit annualized pace, and we expect new building to rise to about 1.15 million homes in 2014," read a section of the Freddie Mac report. "Using the NAHB estimates, this pick up alone should ultimately add close to 700,000 jobs and support a quicker pace of economic growth. That positive momentum in housing construction should help to bring the unemployment rate down and put many back to work."

Other movers and shakers 
The infusion of homes and more jobs is part of a new year expected to be characterized by a wave of transition. Along with the anticipated Fed tapering, the housing finance market figures to be heavily influenced by the continued shift away from refinance activity and the pending implementation of the Qualified Mortgage Rule, which is due to take effect in January and will further emphasize sound mortgage underwriting and loss mitigation practices by lenders. Balancing the standards of risk assessment with the efficiency required to meet the QM's 30-day closing time mandate will present new challenges and force many to adjust their strategies.

Frank Nothaft, Freddie Mac's chief economist, addressed the transitions in a HousingWire webinar released in conjunction with the outlook.

"The big shift ahead will occur as the single-family mortgage market begins transitioning from rate-and-term refinance dominated market, to the first purchase-dominated market we've seen since 2000," said Nothaft. "The emerging purchase market should gather momentum in the coming year."

Nothaft and Freddie Mac also predicted that home values in general will continue to increase, albeit at a less robust pace than the 10 percent appreciation rate exhibited during the first 10 months of 2013. As long as inventory remains relatively tight and buyer demand persists, it seems reasonable that property values will climb in some places and at least maintain their current levels on the high end. A rise in interest rates would, however, limit the ceiling for home prices, a trend that lends itself to Freddie's claim of affordability.

Among the other takeaways from the report are that purchase-money lending is expected to rise by approximately 5 percent, with home sales also increasing by about the same margin. That will reveal itself in the form of significantly less refinance activity - a phenomenon already taking shape during 2013 as the amount of "in-the-money borrowers" dwindles, and should only be compounded by rising interest rates. Freddie also anticipates a continued "rental renaissance." Apartment building property values have risen by more than 5 percent in 2013, and the GSE's prognosis includes the expectation that multifamily investments will remain attractive heading into 2014.