Housing Forecast for 2014: Sunny Days with Some Clouds

We speak with Elliot Eisenberg, GraphsandLaughs.com

ElliotLooking ahead at the 2014, the economic news is pretty solid.  The US economy is on the mend, the labor market is healing and house prices are up about 12% from year-ago levels.  In addition, the Eurozone is working its way out recession, and the U.K. is once again growing as is Japan and China looks to enjoy steady if unspectacular growth.  Closer to home DC budget brinksmanship is over at least till 2015, car and light-truck sales along with consumer sentiment are rising, and new home construction continues its painfully slow but steady ascent.

With all this in mind, I expect 2014 GDP to come it at about 2.65%, substantially higher than the 1.9% in 2013.  As for housing starts, in 2014 they should, for the first time in years, exceed a million units (seasonally adjusted and annualized) with single family starts coming in at no less than 750,000 units and multifamily starts reaching a pace of about 375,000.

Inflation will remain benign.  The combination of lackluster global growth, flat to declining energy and commodity prices, and mildly rising food prices will keep CPI growth slightly below 2%, as food prices look poised to rise more rapidly in 2014 than they did last year.  Moreover, the combination of tiny rises in import prices, and anemic wage growth means that personal consumption expenditure inflation, the Feds preferred inflation measure, will likely be about 1.5% this year and while that is above the 1% rate of 2013, it gives the Federal Reserve ample room to keep short term interest low for the foreseeable future.

As for jobs, given the improving labor market and expected net new monthly jobs gains of close to 200,000 per month, the unemployment rate at the end of the year will be about 6.3%.  As a result of these good trends I expect Chairman Bernanke, incoming Chairwoman Yellen and the rest of the voting members of the interest rate-setting Federal Open Market Committee to begin reducing their monthly purchases of $85 billion/month in Treasuries and mortgage-backed securities sometime in early 2014, most likely in March.

While this reduction will probably begin in $5 or $10 billion increments, I expect the size of the reductions to grow as 2014 unfolds such that by the end of the year Fed purchases of Treasuries and mortgage-backed securities are a thing of the past.  As a result of the end of Quantitative Easing and faster GDP growth, 30-year mortgage rates will probably hit or come very close to hitting 5% by year end.  But not to worry as a combination of easing credit market conditions, increases in consumer spending, slightly rising exports and fiscal certainty in Washington will keep the economy growing despite the mild rise in interest rates.   That is, given decent GDP growth the rate rise will not be growth-sapping.  Lastly, I put the chances of a new recession at no more than 10%.  So, look forward to steady improvement in 2014 and fear not the rise in interest rates.

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Elliot Eisenberg, Ph.D. is President of GraphsandLaughs, LLC and can be reached at Elliot@graphsandlaughs.net.  His daily 70 word economics and policy blog can be seen at www.econ70.com.

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