The pace of the housing recovery showed signs of slowing heading into the fourth quarter of the year, due to the federal government shutdown, debt ceiling issues, and the slowing economy, Freddie Mac reports in its U.S. Economic and Housing Market Outlook for October.

"The housing recovery keeps chugging along despite a constant barrage of disruptions to the broader economy,” says Frank Nothaft, Freddie Mac’s chief economist. “We're likely going to see the housing recovery slow down, but not shut down, as we close out the rest of this year due to tight inventories in many markets, rising mortgage rates, and slumping consumer confidence. Fortunately, the housing recovery should continue to absorb the economic shocks in stride and improve next year."

By the end of the year, mortgage rates are expected to average around 4.3 percent and then increase in 2014, according to the Freddie report.

Limited housing inventories continue to be a challenge for the housing market. Inventories remain constrained at a 5-month supply in September. Freddie’s report says inventories of homes available remain tight due to still-present negative equity for many households, a declining supply of distressed sales, and a “severely depressed level of new construction.” 

The U.S. economy is expected to add less than 1 million housing units in 2013 and around 1.15 million in 2014, which Freddie economists note is significantly below normal levels. 

“Expect the ramping up of residential construction to take a while, and while economic growth will improve over the next year, the economy won’t be operating at full potential until sometime after 2015,” Freddie notes in its forecast. 

Source: “Will the Economic Recovery Shut Down?” Freddie Mac (Oct. 22, 2013)