Fannie Mae: Residential Investment, Home Sales Will Improve in 2019

For the second month in a row we find ourselves stating that Fannie Mae's forecast, while still predicting a slowdown in economic growth this year, appears overall more upbeat than in the previous month.  The April report is still predicting that growth will slow from 3.0 percent in 2018 (which is itself a revision from the 3.1 percent estimate that prevailed in March) to 2.2 percent this year.  The boost provided last year by the Tax Cuts and Jobs Act is expected to fade, and business investment and consumer spending to slow.  However, the company's economists expect residential fixed investment to recover from last year's decline.

The timeline is for domestic growth to slow to 2.0 percent over the first half of 2019 from 2.8 percent over the second half of 2018 and then strengthen in the second half of the year to 2.3 percent "amid a patient Federal Reserve and easing financial conditions."  The economists hold to their prediction that the Federal Reserve will raise rates once more this year but have pushed the timing for that increase from October to December.

There are "balanced risks" to their forecast.  On the downside are potential effects from the trade dispute with China, slowing global growth, and the potential for the looming debt ceiling increase to become mired in politics.  To the upside are the recent rebound in the stock market, the reversal of tightening in financial conditions since the start of the year, and a continued "patient" stance by the Fed.  Another upside consideration is a rebound in growth outside the U.S. if trade disputes and Brexit are resolved in a manner more favorable for business investment than is generally expected. 

Healthy labor market conditions, slowing house price appreciation, and lower mortgage rates are expected to support home sales.  The authors expect them to recover fully by mid-year from their mediocre performance over the second half of 2018, but low inventories continue to be an issue.  Both new and existing home sales were higher in February with the latter posting its largest monthly gain, 11.5 percent, since December 2015.  February sales were at a seasonally adjusted rate of 5.5 million units.  New home sales rose 4.9 percent to 667,000, the highest in 11 months.

Other positive news includes a 10-basis point retreat in 30-year fixed-rate interest, to 4.27 in March and a slower increase, 4.0 percent, in the 12-month CoreLogic Home Price Index.  This is the slowest growth in over six years. Fannie Mae's Home Purchase Sentiment Index jumped 5.5 points in March to 89.8, its highest reading since last June as respondents' positive responses to whether it is a good time to buy or sell gained ground.

The economists say the low housing supply could still derail the recovery in home sales.  While the number of existing homes available for sale grew 2.5 percent in February, faster sales pushed the supply of homes down to the lowest in a year, 3.5 months. Strong sales of new homes helped lower that supply to 6.1 months, the lowest level since last June.

The outlook for inventories isn't helped by construction data. Single-family starts fell 17.0 percent in February to a seasonally adjusted annual rate of 805,000, offsetting the 19.2 percent increase in January. The near-term outlook for single-family construction remains modest as single-family permits, which take about a month to become starts, edged down 0.5 percent to 817,000. Although multifamily starts have recovered to their pre-recession levels, the number built for sale remains depressed, weighing on potential sales.  The March residential construction report, issued after the Fannie Mae summary, did nothing to improve this outlook.

With the projections for stable sales and slower price gains this year they also expect purchase mortgage originations to climb modestly.  The lower rates over the previous four months have yanked projections for a steep decline in refinancing back to a more modest one, but Fannie Mae warns that faster domestic growth or resolution of the downside risks they see to their forecasts could push long-term interest rates up which would, in turn, reduce housing affordability.

In summary, Fannie Mae expects home sales this year will remain at 2018 levels with a mixed near-term outlook.  Average monthly applications for purchase mortgages rose by 7.1 percent in March but pending home sales fell 1.0 percent in February. However, lower mortgage rates, slowing house price growth, and strong job growth are reasons for optimism.  Lower mortgage rates led to a higher estimate for the Federal Housing Finance Agency's Purchase-Only House Price Index in 2019 to 4.6 percent from 4.2 percent in last month's forecast, but the expectation is still for house price growth to slow from 2018's 5.7 percent. If the economy strengthens as expected in the second half of the year, longer-term interest rates could rise, reducing affordability, but stronger economic growth would induce better than anticipated job gains, potentially boosting housing demand. 

Given these forecasts for stable home sales and slowing house price growth, purchase mortgage originations are expected to rise by 2.5 percent to $1.176 trillion. Amid the decline in mortgage rates, refinance originations are now projected to fall 2.2 percent to $446 billion.  This is an upgrade from the March outlook when refinance originations were expected to fall 8.6 percent to $417 billion.