Freddie Mac’s recently released economic outlook describes a refreshingly brighter view of the year ahead, but the pace of recovery in the forecast is well below the growth following most recessions in the past half-century.
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As the still-fragile recovery gradually gains more solid footing by the end of the year, Freddie Mac’s economic outlook anticipates real GDP growth of 3 to 3.5 percent. In addition, Freddie Mac said the jobs picture will improve, but it will be with some delay, as many employers postpone hiring until business picks up further.

While the housing market showed broad signs of stabilizing in the second half of 2009, risks of retrenchment remain high in the face of the heavy flow of foreclosures and REO properties. As a result, prices in the hardest-hit areas have the potential to be depressed even further. At the national level, Freddie Mac said it expects the housing market to weather the growth in distressed sales without significant setbacks, but risks still remain.

Considering current conditions and economic policies as well as the lessons from past business cycles, Freddie Mac believes this view is justified. While this scenario does assume that there is no further flare-up of financial crisis, this appears to be a reasonable expectation, Freddie Mac said. Conditions in most parts of the market are on the mend, many risk spreads are returning to pre-crisis normal, and corporate bond markets have largely recovered. In December, the first commercial mortgage-backed security was issued without TALF backing since mid-2008, but the private-label single family mortgage-backed security market is still largely frozen.

Following the 1974-1975 recession and the double-dip recessions in the early 1980s, economic growth surged 7 percent or more for sustained periods. This is more than twice the pace Freddie Mac expects over the coming year. Such subdued performance is due in large part to the aftereffects of the financial crisis, including the high rate of mortgage defaults, the growing inventory of loans in foreclosure, weakened bank balance sheets and the corresponding reluctance to lend, and depressed household net worth.

However, macroeconomic policies aimed at offsetting these drags are providing support for the recovery. About one-third of the $784 billion of fiscal stimulus money was spent or went to Americans in the form of tax deductions during 2009, and including funds obligated for projects and activities brings the total funds committed to about one-half of the $748 billion. Freddie Mac said most of the remaining funds will flow into the economy this year, bolstering private spending.

In addition, monetary policy is extremely accommodative, and FOMC statements have signaled that target interest rates are likely to remain “extraordinarily low” until the economy and labor markets improve. While the Fed has said most of the liquidity facilities put into place during this crisis will continue to wind down, private markets appear ready to reassume their role, eliminating the need for these facilities to go forward.

The near-term picture of housing market trends was clouded by the passing of the original deadline for the first-time home homebuyers’ tax credit, Freddie Mac said. Home sales surged in 2009 in advance of the planned end of the credit, but sales may experience a temporary slowdown as many potential buyers who would normally have bought a home in early 2010 rushed to close before the end of November.

Initial reports of housing activity are consistent with such a decline. According to the Mortgage Bankers Association, mortgage applications for home purchases declined 20 percent in December, relative to the third quarter average, and the National Association of Realtors reported a 16 percent decrease in pending home sales in November. The weakness in pending home sales even prior the original expiration of the tax credit could be due to the length of time from when a contract is signed until closing, Freddie Mac explained. A lower level of closings in December would imply fewer pending contracts in November.

With the extension of the tax credit through spring and its expansion to include existing home buyers, it is likely that additional buyers will accelerate their purchase decisions into the first half of 2010. As a result, a rebound in sales is expected.

Despite the expected pickup in sales, single-family mortgage originations are projected to be about 10 percent lower in 2010, compared with last year. This decline in originations is driven by lessened refinance activity, as the refinance share is projected to slip from approximately two-thirds of lending in 2009 to just over one-half of this year’s volume.

In a market where the interest rate differential relative to the adjustable-rate mortgage (ARM) is small, borrowers prefer the steady principal and interest payments of a fixed-rate loan. As a result, ARM volume is anticipated to continue to be muted. In addition, interest rates for 30-year fixed-rate loans are projected to remain in the 5 to 6 percent range through 2010, marking a continuation of a relatively low-rate environment that will support the housing market recovery.