Jobs and income growth are key "to turn in another gold-medal performance for the housing recovery" in 2014, according to Frank Nothaft, Freddie Mac's chief economist.
"Rising home prices and interest rates along with little to no income growth has resulted in a substantial erosion of homebuyer affordability over the past year," Nothaft said. "If rates continue their upward trend, it will be difficult for many families to purchase a home without seeing some income growth."
An improving economy is helping to bolster the housing market but lackluster labor reports in January are resulting in a slow start for the residential sector, according to Freddie Mac's latest Economic and Housing Market Outlook.
Freddie predicts unemployment to stay at 6.6 percent in the second quarter and fall to 6.4 percent by the end of this year.
Despite the Federal Reserve beginning to taper its $85 billion per month bond-buying stimulus program in January, 10-year Treasury yields and fixed mortgage rates mostly eased over the month, falling about 0.3 percentage points between January and early February.
"It appears mortgage rates may have given the market a reprieve for a month or so and provided some borrowers another chance at refinancing, especially those folks that may be holding older mortgages," Nothaft said.