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Can the Housing Recovery Handle Higher Rates?

Tuesday, May 19, 2015

That headline question is the focus of the May Economic and Housing Outlook produced by Freddie mac's Office of the Chief Economist.  The economic team, headed by Leonard Kiefer, Deputy Chief Economist, notes that housing stumbled in 2013 when rates rose by a full percentage point in May and June of that year.  Sales slowed in response and are only now recovering to their levels before that event.  Are we due for a repeat?

The first quarter of 2015 showed some economic weakness.  Real GDP growth was preliminarily estimated at 0.2 percent annualized but indications are the final number will dip below zero.  The second quarter looks better but below 2014 returns yet improved European economic news has driven U.S. interest rates higher and Freddie Mac expects they will continue to rise over the remainder of this year.  How fast will be a function of international and domestic economic growth, Federal Reserve policies, and what markets expect from these three factors.  There could be significant volatility around any Fed policy changes with expectations that the central bank may raise the Fed Funds rate as early as next month but more likely in the fall.  If the Fed continues on its current path, rates will likely start rising by midsummer although they may have already started the expectations cycle.

 

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