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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Feb 8, 2021

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The housing industry is built on calculated estimates, but as time passes, it is clear that this highly-researched information is merely a guess. researched how well economists and housing professionals predicted what would change in 2013.

In the next two months, this same group of economists will make housing and economic predictions for the upcoming year of 2014. Comparing the past predictions with the current statistics prove that despite heavy research, the housing industry is a fluid market and suggestions should always be taken with some discretion.

10-Year Treasury Rates

The growth and decline of the housing market is influenced by hundreds, if not thousands of factors, but one of the largest indicators is the 10-year Treasury Note. Mortgage loan interest rates are impacted directly by the 10-year Treasury rate. When the rate is high, banks are forced to offer a higher interest rate to their customers.

At the end of 2012, the 10-year Treasury rates were extremely low, reaching averages not seen since the end of the Second World War. The debt crisis in Europe, a budget shutdown in the United States and all-around minimal growth led to those low figures.

The program started its third round of securities-buying and began to purchase $45 billion worth of Treasuries each month at the beginning of 2013. Due to an increased Fed stimulus program, the 10-year Treasury was expected to improve steadily throughout 2013.

According to data from the U.S. Department of the Treasury, the 10-year treasury rates were impacted by the Fed program, as shown by the chart below.

Date 10-Year Treasury Rate
12-3-12 1.63
1-2-13 1.86
2-1-13 2.04
3-1-13 1.86
4-1-13 1.86
5-1-13 1.66
6-3-13 2.13
7-1-13 2.50
8-1-13 2.74
9-3-13 2.86
10-1-13 2.66

The chart above shows that as the third installment of the Fed’s bond purchase program began, the 10-year Treasury rate strengthened. There was a drastic drop between April 1 and May 1, going from 1.86 to 1.66 percent, but by the following month of June, the rate balanced out once again, reaching 2.13 percent.

Zack Alawi, designated broker for Real Pros Arizona, attributes the large growth to the Fed’s intention to keep inflation at bay and increase growth through quantitative easing.

“The Fed’s bond purchase program helped to inflate the rate thereby keeping mortgage rates low,” he said. “Low rates help drive the real estate market.”

Although the bond purchase program helped the suffering housing market, it could not be sustained forever. This past June, the Fed notified the public that it would soon begin to reduce and then eliminate the program. This announcement caused uncertainty and turmoil in the market. Several months later, Fed Chief Ben Bernanke stated that economic growth was not at the expected level, and therefore the bond purchase program would not shrink soon.

The sudden change in mortgage loan interest rates caused by the Fed announcement showed that the housing market can be influenced by emotional factors, according to Hale Walker, co-founder and senior vice president of Michigan Mutual Inc.

Due to the sudden spike in mortgage loan interest rates, both home purchases and refinances stalled. The speed of the rate increases, not the actual change, impacted the market more.

“That speed got everyone’s attention in the industry and it got the consumer’s attention too,” Walker said.

Freddie Mac’s Predictions

The largest housing organization sponsored by the federal government is Freddie Mac. The chief economist at Freddie Mac, Frank Nothaft, made five main predictions at the end of 2012, which we covered.

The estimates were generalized, safe and on a national scale.

Alawi told that the five end-of-year predictions made by Freddie Mac were “painted with a broad brush.”

Despite the generalization, three out of the five predictions were inaccurate.

Prediction Actual Results Verdict
Fixed-rate mortgages should remain below 4 percent interest rates. The 30-year FRM rose above 4 percent for the first time on June 23, 2013 and spiked to 4.48 percent on Oct. 1, 2013 Fail
House price indexes should increase 2-3 percent. The Federal Housing Finance Agency (FHFA) reported a 2.1 percent increase in Q2 2013. From Q2 2012 to Q2 2013, the house price index rose 7.2 percent Fail
Household formations should increase by 1.20 to 1.25 million net households. Household formations have decreased rapidly, dropping from 973,000 in December 2012 to 335,000 in June 2013. Fail
Vacany rates for apartments and single-family homes should reduce significantly and reach lows seen 10 years ago. Vacancy rates have dropped for both apartments and single-family homes. For apartments reported Q1 2013, the vacancy rates dropped to its lowest reading since 2001. Pass
Refinancing mortgage loans should continue to decrease in numbers. The total number of refinances have decreased. Several large banks have fired staff members due to decreasing refinance needs. Pass

Fixed interest rates: Interest rates for fixed rate mortgages spiked higher than predicted at the end of 2012. The 30-year rate peaked nearly 50 basis points higher than expected, creating higher costs for potential homeowners.

In fact, according to Freddie Mac data, the 30-year rate averaged above the 4 percent prediction for a total of 17 weeks in 2013.

House price index: The reason why the predictions for the house price index failed is not based on negative results, but simply because the index fared significantly better than estimated. The yearly change during the second quarter of 2012 to 2013 increased 7.2 percent.

Despite national averages, home values depend mainly on the exact location of the property. Certain neighborhoods have experienced above average growth, but Walker said that even on a national scale, the numbers are up.

“What is the housing market in that county and that city?” he questions when reviewing a property. “I could care less what it looks like for the state or the nation as a whole.”

Household formations: The number of household formations in the United States has drastically dropped in the past two years. Although there were obvious fluctuations, formations dropped from nearly two million at the beginning of 2012 to a current measly 335,000.

But similar to home price indexes, housing formations on a national scale blurs smaller trends. For instance, Walker has seen a 2 percent increase in household formations by single female buyers. He said that single male buyers have remained stable at their current numbers, but female buyers without a partner or children have increased their presence in the market.

Vacancy rates: The National Association of Home Builders found that during the first quarter of 2013, vacancy rates surpassed their goals for the entire year. When these rates are low, it signals two trends: housing is in demand, and construction is unable to keep up with this need.

Refinancing: The number of refinanced mortgage loans decreased as predicted during 2013. Since homeowners and mortgage loan borrowers refinanced significantly less than the previous year, many lenders were forced to shrink their loan staff, creating a drop in that specific job market.

Walker said that a rising increase in home values should help with future refinances. Many consumers waited to refinance because their home values were lower than expected and were unable to secure a valuable refinance.

Pulsenomics and Zillow’s Prediction

Another major indicator of the health of the housing economy is home prices. A survey from Pulsenomics and Zillow estimated whether national averages would increase or decrease.

At the end of 2012, a nationwide panel of professional forecasters predicted a positive direction for home prices in 2013. Over 100 people submitted their opinion, creating one of the largest end-of-year surveys for the industry.

Prediction Actual Results Verdict
Home prices should increase by 3.1 percent. Home prices increased nationally by 10.5 percent. Pass, but severely underestimated

Although the data-driven survey only focused on one main element, the survey’s inclusion of over 100 housing professionals created a well-researched average.

According to data from the National Association of Realtors, sales prices for existing homes in the United States were $180,200 during December 2012. Less than a year later on September 2013, the same average was $199,200.

The survey predictions were not incorrect, but they underestimated the growth significantly. The actual average national home price increased 10.5 percent.

Several of the economists listed in the survey were closer to the actual results. The survey included estimates that were lower and higher than the average. For example, Gary Shilling, president of A. Gary Shilling & Co. predicted negative change of 6 percent for 2013. The survey respondent with the highest prediction, and the one that neared to the actual results, was Joel Naroff, president of Naroff Economic Advisors. He estimated that the year would experience 7.2 percent growth in home price averages.

End-of-Year Predictions

This upcoming November and December will bring another set of predictions for the upcoming 2014 financial year. But each analysis is only an estimate, and should be regarded as such.

Alawi said that prognosticators and economists are “just speculating at best.”

“Any long-term prediction is bound to be fraught with misquotes,” he said.

Many general estimates are correct, but the market is fluid and based on factors that few can control. As the research above illuminates, each prediction should be taken with caution.