Fannie Mae Expects Low Rates to hold through 2014

Thanks to problems in Europe and the slowing of both the US and Chinese economies, consumer attitudes have plateaued after several months of improvement early in the year.  Fannie Mae's Economic Forecast for June, released Tuesday, said that the lull in employment gains is particularly troubling and while the probability of a renewed recession has not risen, the risks to growth have shifted to the side of slower growth.

Prospects for economic growth have been revised down to 1.9 percent annualized from an earlier estimate of 2.2 percent as a result of less inventory buildup and smaller consumer and government spending.  Lower inventories, however, will be positive going forward as they will not present a drag on growth.

Fannie Mae's economists see a brightening housing picture saying that after the record lows in single family home sales and housing starts last year the housing sector appeared to be turning the corner in the first quarter; the slow pace of new construction and delays in foreclosures have combined to bring about a more balanced housing market.  Indicators showed some loss of momentum late in the quarter, possibly because unseasonably warm weather pulled some activity forward but April data showed improvement in sales and starts so the housing recovery seems to be back on track.  

Despite positive news on home prices, with many measures showing prices firming and distressed sales shares declining, Fannie Mae projects further declines in prices through the end of the year.

Lower mortgage rates have boosted interest in refinancing, with mortgage applications for refinancing rising to the highest level since February-although activity is still below the levels seen during the fall of 2010.  One goal of refinancing programs has been to boost economic activity but household desire to deleverage and the inability to extract equity from underwater homes has somewhat limited the stimulative effects of refinancing although it has strengthened household finances longer term.

The multi-family construction sector has improved faster than the single-family segment, with year-to-date building activity running more than 40 percent ahead of last year's activity. The sector should continue to perform well this year, as fundamentals continue to improve, with rising rents and net absorption far outpacing completions.

The continued flight to quality prompted by the European situation has kept interest rates low and Fannie Mae expects them to remain low and a support to the housing industry through the year.

Fannie Mae says they expect Operation Twist to be completed at the end of June as planned and that the target Fed funds rate will remain unchanged until at least late 2014.  While additional easing in on the table it will likely require significant deterioration in the economy before it is implemented and the company does not expect an asset purchase program.