WASHINGTON (MarketWatch) — While the housing market is showing signs of life, the looming fiscal cliff remains a threat, as does global instability, the chief economist at mortgage-buying giant Freddie Mac told MarketWatch.

For 2013 Frank Nothaft expects mortgage rates to stay low as home values and household formation rise. However, as Nothaft recently wrote in a Freddie Mac blog post, his crystal ball predictions will “shatter” if U.S. lawmakers allow the country to go over the fiscal cliff. Even if a compromise is reached in Washington, global instability could still cut growth in a U.S. housing market that analysts say has recently bottomed out.


Here’s an edited transcript of what the chief economist at Freddie Mac said:

MarketWatch: What do you see as the biggest threat to a recovering housing market in 2013?

Nothaft: The most immediate thing is the one that’s in the press every single day, namely the fiscal cliff. If for some reason they can’t work out a compromise to avoid the fiscal cliff, then that’s going to have a serious impact, not just on the housing-market recovery, but for the overall recovery in the macroeconomy.

If it should come to pass that the unemployment rate starts going up and goes up to 9%, as the Congressional Budget Office has projected, then we are going to see a decline in home sales, we are going to see a decline in household formations, and that then has a broader impact on new construction of housing units. So, sales will be weaker, starts will be weaker, and, of course, that means that house prices in national indices will be weaker as well. See MarketWatch’s fiscal-cliff page.

If they can work it out, the main threat longer term is that there are other factors that could slow or derail the macroeconomic recovery. There could be unforeseen events in the euro zone that then impact and retard the recovery in the U.S. There could be unforeseen events in the Middle East or elsewhere in the globe that disrupt energy supplies. If there is a big spike in energy costs, that has broad impacts throughout the economy and weakens economic activity.

What’s so important right now in supporting housing demand is, of course, low mortgage rates and we have that. But what we need now is the growth in jobs and the growth in incomes. That will help support housing demand overall because more families will have the resources in order to form households, either renting apartment or buying homes.

Q: What is the biggest misperception in the public about the housing market?

A: A big misperception is that you can’t get mortgage financing, or that it’s really hard to get mortgage financing. That’s something that I hear quite often.

While there’s no question that underwriting has tightened compared to the underwriting that was occurring in 2005, 2006 and even in the beginning of 2007, still there are many applicants who are getting mortgages. What’s important in applying for a mortgage today is just to make sure that you have an adequate down payment, that you have stable income and you have good credit history. If you have those three components, then that takes you a long way toward being successful applicant for a mortgage.

Q: Before the bubble burst, fixed residential investment accounted for about 6% of GDP. Now that percentage is down to about 2.5%. Going forward, what will be the new normal for housing’s share of the economy?

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Fixed residential investment has seen its share of GDP decline to about 2.5% from a bubble peak of more than 6%.

A: Residential fixed investment was unusually high in the period leading up to the boom because of the very large amount of construction and home sales. If you look over a longer period of time residential fixed investment typically averages more like 4% or 5% of GDP.

There’s been a pick up in residential fixed investment. Maybe in 2015, 2016 we’ll see residential fixed investment up around 4% to 5% of overall GDP.

Q: Certain regions have seen large price gains for housing, while others remain below levels from more than a decade ago. How long will areas like Phoenix dominate price gains?

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House prices in Phoenix saw a 20% year-over-year gain in September.

A: One thing that’s really important to keep in mind when looking at the large percentage increases in some markets like Phoenix, Las Vegas, Miami and so on, is that they are from very, very low levels. The prices are at such incredibly low levels that this leads to what appears to be a very high or fast percentage gain. Even with these price gains, say, in the Phoenix market, prices are still way, way below where they were back in 2006. I suspect we will continue to see gains in value in markets like Phoenix, Las Vegas and Miami over the course of 2013 that are faster than the national increase, but not quite at the same pace.

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Q: What kind of a threat does shadow inventory pose to the housing market’s recovery?

A: As we’ve seen over the past year the housing market is recovering even though there is this large shadow inventory. In most markets around the country, the housing market will continue to recover. There is a flow into REO [real-estate-owned properties are foreclosed homes held by lenders], but that flow is relatively steady over time. The market has been able to account for that and absorb that flow into the marketplace and begin to turn around and recover. Going forward we’ll see the same pattern. It will still be an important component of the market, but it already has been for several years, and yet we’ve begun to see the recovery really take hold.

Q: Interest rates have been hovering near record lows for some time. Refinancing, rather than home buying, has seen the bulk of the activity taking advantage of these low rates. How long will there trends continue?

A: We will continue to see very low mortgage rates throughout most of 2013. We’re going to start the year with mortgage rates continuing at or about record low levels and it will be that way for much of the year. The 30-year-fixed-rate mortgages will stay well below 4% throughout 2013, likewise 15-year-fixed-rate mortgages will stay well below 3%. You have the Fed standing behind the market, promising to be very proactive in purchasing Treasury securities and mortgage-backed securities.

In some sense there’s refi burnout. We’ve had many, many homeowners who have refinanced over the last several months. We have a dwindling pool of borrowers who really have a big financial incentive to refinance.