Fannie Mae Economists see 2013 as a 'Transition to Normal'

The economists at Fannie Mae released their first economic forecast of 2013 and introduced their theme for the New Year, "Transition to Normal."  This theme, they said, has profound implications for a number of longer-term challenges facing the country and reflects the rebound of housing along with the fiscal policy decisions made and yet to be made.  "It is unclear where this transition will lead and what type of economic growth path awaits.  Some have questioned whether the country has entered a prolonged period of below-potential GDP growth, which they label "the new normal."  Others ask when housing will return to normal." The forecast says.  

The economists project that the first interest rate hike by the Federal Reserve will not occur until the second half of 2015, so long-term interest rates should increase very gradually over the next few years with the yield on the 10-year Treasury note rising from its current 1.86 percent to 2 percent at the end of 2013 and 2.3 percent at the end of 2014.  Mortgage rates should follow a similar pattern, ending 2013 and 2014 at around 3.8 percent and 4.2 percent, respectively.

The Federal Reserve Board's Senior Loan Officer Opinion Survey indicates that while the majority of lenders have loosened mortgage lending standards slightly from the tough ones adopted in 2007 they have changed little since 2010.  This partially explains the moderate increase in home sales despite record high housing affordability.

Rising guaranty fees and FHA insurance premiums will increase the cost of obtaining mortgages going forward; however the effect of the newly released Qualified Mortgage rule mortgage originations is still an unknown.

Policies encouraging refinancing are likely to wane after this year.   There are still significant numbers of homeowners who could benefit from refinancing and they should keep the level of activity high for the rest of this year.  The Home Affordable Refinance Program is set to expire at the end of 2013 and the Federal Reserve will likely give further guidance on its plans to end quantitative easing which will start to put upward pressure on interest rates.  'Thus, we expect 2012 to be seen as the high watermark for refinances and 2013 as the first of several transition years as the housing finance market transitions back to a more normal balance between purchase and refinance activity," the forecast says.

Housing indicators show that the recovery in that sector is on a faster upward track.  Improvement in employment and low mortgages rates are beginning to drive prices away from their low point in the first quarter of last year and housing's contribution to economic growth is expected to increase in this and the following years. 

New and existing home sales have trended higher and the inventory of both new and existing homes for sale have dipped well below their long-term averages, indicating a balanced home sales market.  Declining inventories amid rising demand has created opportunity for home building activity: both housing starts and permits are on the upswing for both single-family and multi-family construction.

Household formation, one of the main components of housing demand, continues to rebound, helping to reduce the homeowner and rental vacancy rates. Lenders have increased efforts to implement short sales and other foreclosure alternatives, helping to support better home price trends. Serious delinquency rates, though still high by historic standards, have gradually declined from their peaks in most areas. Home prices have reflected a more balanced housing market and declining shadow inventory, with annual gains accelerating substantially in the second half of 2012. Improving market conditions have accompanied a corresponding rise in homebuilder confidence. Overall, building activity, home sales, and home prices as well as homebuilder confidence, have risen to multi-year highs.

Fannie Mae expects housing starts to rise by approximately 23 percent in 2013 to 950,000 units, about the same increase as in 2012.   While still well below the peak of more than 2 million units in 2005, it will be more than 60 percent above the record low in 2010.

Fannie Mae's projections of headship rates-the rates that population in various age cohorts will form into households- coupled with new Census Bureau data, leads to an estimate of a 1.37 million annual growth in households in the second half of the decade. 

During the same period, there should be an annual increase in vacancy units of 160,000. This component of housing demand includes demand for second homes and vacant homes for sale and for rent required to facilitate the liquid operation of a healthy housing market. Vacancy rates have trended close to their long-term averages.

The third and final component of housing demand is net removals, which include houses lost to intentional demolition and disasters, and the net conversion of structures between residential and non-residential use.  Fannie Mae "conservatively" estimates 230,000 net removals per year or 0.2 percent of the housing stock.  Summing up all the units of housing required for new households, vacant units, and net removals, Fannie Mae expects a "normal" or sustainable housing supply of 1.76 million units of single-family, multifamily, and manufactured homes.

The forecast indicates continued rising homebuilding activity, with housing starts reaching sustainable levels in 2016, marking a 10-year process of transition from the downturn back to normal activity.   Existing home sales should to trend up steadily, reaching nearly 6 million units in 2016. That pace of sales implies a 4.3 percent increase in the housing stock, which appears to be the normal rate of turnover, based on historic trends.

Given the expectations of continued improvement in housing starts, home sales, and home prices in 2013, the economists project that purchase mortgage originations will rise to $642 billion from a forecast of $518 billion in 2012 while refinance originations should decline to $961 billion from a projected $1.4 trillion in 2012, a refinance share of 60 percent compared to 73 percent in 2012.    Outstanding mortgage debt will decline an additional 0.8 percent in 2013, following an estimated 2.2 percent decline in 2012.

The American Taxpayer Relief Act of 2012 which was signed into law on January 3 contained two provisions which should have a positive impact on housing.  One is the extension of the Mortgage Forgiveness Debt Relief Act of 2007 which excludes debt forgiven by a lender following a short sale or foreclosure from taxation.  The second provision extends the deductibility of mortgage insurance premiums for taxpayers.