Housing Recovery Intact but Moderating Fannie Mae says

Fannie Mae's Economic and Strategic Research Group calls the temporary government shutdown and debt ceiling negotiations in October a blow to consumers who "were cautious in their spending amid continued eroding confidence.  Housing indicators slowed further, and housing expectations turned bearish despite declining mortgage rates."  Businesses, however, seemed to have shrugged it off, showing the strongest payroll gains since February which was part of the reason behind the Federal Reserve advancing its schedule for tapering the purchasing program. 

The Group predicts the events in October will foreshadow likely continued market volatility during the next few months.  Economic growth will be hampered by several unresolved fiscal and monetary policy decisions which will weigh on consumer spending such as the appointment of a new Federal Reserve chair in January and another round of budget and debt ceiling debates.  Still the group expects modest growth of approximately 2.0 percent for the remainder of the year followed by a pick-up to 2.5 percent for 2014 once the fiscal drags wane and as labor market conditions improve further.

"The November economic and housing forecast reflects many of the themes we saw last month, specifically regarding the effect of the policy decision process on consumer attitudes," said Fannie Mae Chief Economist Doug Duncan. "Monthly data showed weakening momentum in real consumer spending and suggest a reluctance among consumers to take on more debt. Notably, third quarter data show that consumption grew at 1.5 percent, which is significantly lower than the average annual increase of 3.4 percent between the end of World War II and the year 2000. The modest consumer spending levels in recent months are consistent with the bearish trend in consumer confidence, which dropped significantly in the fall amid the fiscal standoff. Since many remaining policy decisions will spill over into the beginning of next year, it seems likely that both consumers and businesses will continue to pull back in the interim, lending to increased volatility in the markets."

The Group calls the housing recovery "intact" but says it is moderating.  During the third quarter real residential investment contributed 0.4 percentage point to GDP for the second consecutive quarter.  Much of the housing data which goes into the report has been delayed by the government shutdown but absent September data on housing starts, permits, and new home sales, so far this year single-family housing starts have been disappointing even though permits have risen.

Existing home sales decreased in September and the sharp decline in pending sales indicates that this trend will continue in coming months.  Builder confidence also edged down for the second month in a row and the October National Housing Survey showed a worsening housing market sentiment with home price growth expectations moderating and the biggest ever one-month drop in the numbers of respondents who say it is a good time to buy a house.  Multi-family starts have pulled back from the highs witnessed in the spring.

Home price gains also began to moderate, in part a seasonal phenomenon, but year-over-year gains remain strong.  The economists say they expect that the historically tight inventories will continue to support more price gains.  The decline in shadow inventories also bodes well for prices.  Because of the rapid price appreciation in the first half of the year the decline in properties with negative equity accelerated, falling to 14.5 percent or 7.1 million borrowers in the second quarter compared to 19.7 percent or 9.6 million borrowers in the first quarter according to CoreLogic.  Serious delinquencies also declined from a 90+ day rate of 9.70 percent at the peak in 2009 to 5.65 percent last quarter.  Both of these factors mean fewer homes are likely to fall into foreclosure.

There also appears to be an easing of credit conditions.  The Federal Reserve's Senior Loan Office Opinion Survey found for the fifth quarter that more banks reported an easing of credit standards for prime mortgage borrowers.  However demand has also weakened with 90 percent of survey respondents saying refinancing demand had substantially declined since spring while a smaller number said the same about purchase mortgage demand.

The drop reported to the Fed is consistent with results from the Mortgage Bankers Association Weekly Survey of Mortgage Applications. Refinance applications declined sharply between May and early September before rebounding modestly through mid-October. However, the latest survey during the first week of November showed that refinance applications fell for the second time in three weeks, while purchase applications dropped for the fourth time in six weeks to their lowest level this year.

Long term interest rates moved up in response to the strong October jobs report with 10-year Treasuries jumping 15 basis points to 2.75 percent.  Mortgage rates will likely rise somewhat in the near term then as the economy picks up should reach about 4.8 percent by the end of 2014

Because of what is calls the lackluster performance of single-family housing starts Fannie Mae has lowered its projections for the remainder of 2013 and for the next two years, but maintained existing estimates for existing home sales and home prices.  For 2013 they expect total mortgage originations to decline about 15 percent to $1.83 trillion and refinances to drop to around 63 percent compared to 73 percent in 2012.