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Economists: Home Market Gains This Year Hinge on Job Growth

Wall Street - A panel of top economists expressed generally optimistic views Tuesday about the U.S. housing market, predicting sizeable gains in home construction and new-home sales this year as long as interest rates don’t rise too quickly and job growth continues to advance at a moderate pace.

Economists speaking at the International Builders’ Show in Las Vegas, which is expected to draw 80,000 attendees this week, predicted a 20% increase in home construction this year and an even larger gain in new-home sales. They foresee home-price increases cooling from their double-digit percentage gains or recent years to rise this year by a more subdued 5%.

However, the economists – the National Association of Home Builders’ David Crowe, Freddie Mac FMCC +1.37% ’s Frank Nothaft and Nationwide Insurance’s David Berson — cautioned that much of their forecast relies on job growth.

The optimistic outlooks bode well for overall economy since housing construction and home sales have significant influence on business activity. When consumers buy homes, they also buy furniture and many other goods and services, spreading out the economic benefit across many industries.

The builders’ association’s Mr. Crowe foresees sales increasing by roughly 40% this year to 603,000. He sees builders starting construction of 1.15 million homes this year, a 24.5% gain.

“Once we get a stronger job market, more jobs being created, higher income growth, we will see an increase in household formation,” Mr. Berson said.

For Mr. Nothaft, the change to watch for this year is a shift by lenders to focus more on originating loans for purchasing homes rather than for refinancing. Lenders have concentrated mostly on refinancing loans for several years as interest rates have hovered at historically low levels. But, a combination of an expected rise in rates this year and increases in sales of new and existing homes will spur them to turn to the so-called purchase market.

According to the Mortgage Bankers Association, refinancing accounted for 63% of mortgage originations last year and 71% in 2012. The bankers association predicts that ratio will reverse this year, with refinancing accounting for 39% of originations and purchase loans 61%. That would be the first time that mortgages for purchases have outpaced refinancings since 2000.

“With fewer refis, we’ll see lenders do more proactive outreach to attract those buyer applications for mortgage loans,” Mr. Nothaft said. However, it remains to be seen if lenders will compete to land those borrowers by slightly loosening loan-qualification standards.

Meanwhile, theories abound on what has hindered home construction in recent years. Although the Census Bureau reported on Monday that private residential construction rose more than 18% last year, some economists believe construction activity should be even stronger considering the length of the economic recovery.

“We’re returning to a little closer to normal,” said Mr. Hunter, who is attending the Builders’ Show this week but didn’t appear on the IBS economic panel. “Inventories will not be as tight. Demand and production levels will be higher.”

That has several observers expecting a larger increase in home-construction starts this year than last. Freddie Mac’s Mr. Nothaft predicts 1.1 million housing starts this year. “We still have at least a couple more years before we’re back to a normal pace of home construction,” Mr. Nothaft said in an interview prior to the conference.

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