Fannie Sees Slow Growth Through End of Decade

Fannie Mae's Economic Outlook series continued its 2013 theme "Transition to 'Normal?'" in its June edition saying that four years into an expansion it appears the country may be well into a prolonged period of sub-par but sustainable growth.  Fannie Mae's economists say that they expect the annual growth rate between now and the end of the decade will average between 2.25 and 2.50 percent where the consensus of what would constitute normal will likely be around 2.75 percent.  Thus growth will probably be a bit slower than the potential of the economy and if that proves incorrect it will likely be housing and energy development that drive it higher.

The economists, Doug Duncan, Orawin T. Velz, and Brian Hughes-Cromwick, say their intermediate term view has changed little since the beginning of the year; modest growth for this year before accelerating moderately next year, and a durable recovery for housing with homebuilding and construction employment returning to normal around 1916.

There have been some surprises, however with a more restrictive fiscal policy than anticipated but more consumer resiliency despite the sequester, the end of the payroll tax holiday and tax hikes on higher earners and associated with the Affordable Care Act.  Accelerated home prices have helped to offset some of the economy's negatives.

In the housing sector they see upward momentum building.  Home sales, especially single-family sales, were at the highest level in April since April 2010 and year-to-date sales were 26 percent above the same period in 2012.  Fannie Mae's forecast calls for steadily rising new home sales, reaching normal levels by 2016 when the ratio reaches 2.7 sales per 1,000 population.  This would mark a ten year process from the downturn back to normal activity.

Existing home sales reached their highest level since mid-2009 in April but housing starts fell sharply, primarily because of the volatile multifamily sector.  Housing permits jumped to a 1 million annual pace and home builder confidence rebounded in May after three consecutive monthly drops with an especially strong gain in the expected sales component.

Fannie Mae said that key to this view of a durable housing recovery is the turnaround in home prices which seem to be accelerating their gains which are also widespread, rising in more than 90 percent of CoreLogic's 100 metropolitan areas.

The expectation of rising prices might entice potential homebuyers into the market and may signal better conditions to potential sellers.  The National Housing Survey for May showed a surge in consumer expectations for more price gains over the next 12 months and the share of respondents who viewed this as a good time to sell was the largest since Fannie Mae began the survey.

Driving the higher prices have been both shrinking inventories of homes for sale and fewer distressed properties on the market.  April marked the first time that the share of distressed home sales was below 20 percent since 2008.  Tight inventories may be easing, at least for existing homes but the number of new homes available has only gradually trended up since the record low of last summer. 

This has created an opportunity for spec building which dominated the market prior to the housing crisis but dived to a trough in 2010.  Those homes, built without a contract with the buyer, are trending upward although they remain at historically low levels.

Mortgage rates spiked in early June and have already impacted mortgage demand.  During May mortgage applications fell 6 percent but refinance applications were down 40 percent during the same period.  Fannie Mae's economists' predictions for mortgage rates has jumped about 50 basis points since the May forecast with the yield on the 30-year fixed rate mortgage expected to rise to 4.7 percent by the end of 2014.  Despite this, they expect the housing recovery to continue with housing starts and home sales rising in 2013 by 25 percent and 7 percent respectively.  They have revised the estimate of last year's mortgage production volume upward because they may have underestimated the number of originations held in depository institution portfolios.  They also raised the value of mortgage originations last year from $1.92 trillion to $2.02 trillion.  This lifted the trajectory for 2013 by about $75 billion to $1.74 trillion with a slightly higher refinancing share of 65 percent.  This, however merely front-loaded estimates of refinance originations and significantly decreased projected refinance originations in 2014. 

The latest data from the Federal Reserve show outstanding single-family mortgage debt fell 2.3 percent on an annualized basis in the first quarter of 2013.  Fannie Mae expects it to post a slight gain in 2013 - the first annual increase in six years.