Despite Downward GDP Revisions, Fannie Sees Housing Holding Steady

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Fannie
Mae has lowered its forecast for first quarter 2018 growth from 2.9 to 2.8
percent due to “lackluster consumer spending and nonresidential and residential
investment.  The second report of 4th
Q GDP downgraded real growth by one-tenth to 2.5 percent annualized. Incoming
data has shown weaker domestic demand, with real consumer spending down 0.1
percent in January, the biggest monthly drop in a year. Based on this, Fannie also
lowered its real consumer spending growth forecast for the first quarter to 2.2
percent annualized from 2.7 percent in the February forecast.

FY
2019 looks brighter, and the company’s economists have raised their full-year
2019 GDP forecast to 2.5 percent and lowered their outlook for unemployment to
3.6 percent. They stress that more rapid wage and inflationary pressure might
lead the Fed to more aggressively tighten monetary policy which would pose
downside risks for their projections.

Their
view of housing reflects the mixed start to the year. January’s single-family
construction starts partially recovered from their double-digit dive in
December and multifamily starts, at 500 units, surprised everyone. It was the
highest level for those starts since the end of 2016. Multifamily permits were
up for the first time in three months.

 

 

Existing
home sales, on the other hand, kicked off the year with their second
consecutive decline.
While demand is solid, inventories are continuing to
shrink. Pending home sales, a leading indicator, also fell sharply in January,
portending more slowing in existing home sales ahead. New home sales were down
as well, but upward revisions to earlier months tempered that news.

One
reason for projecting a decline in the residential investment sector of the GDP
mentioned above can be seen in the housing inventory numbers.  The shortage of both new and existing home
listings are constricting sales (and thus brokerage fees, a component of residential
investment) and the new home inventory, while better than that for existing
homes, continues to show the depressed level of construction activity.

The
pace of home price appreciation remained strong at the end of the year with
most indices reporting more than 6 percent in year-over-year gains in December.
While this appreciation hurts both sales and affordability, it helps boost
homeowner equity
. During the fourth quarter of 2017, that equity, expressed as
a share of real estate value, reached its highest level in nearly 12 years.

 

 

The
company’s forecasts for housing activity and mortgage interest rates have not
changed over the last month. The economists project that purchase mortgage
originations will rise about 5 percent from 2017 to $1.19 trillion this year,
while refinance originations will drop about 30 percent to $498 billion.
Single-family mortgage debt outstanding grew 2.8 percent annualized during the
fourth quarter, the slowest pace in three quarters, but for all of 2017, it
increased 3.0 percent, the biggest annual gain since 2007.

Returning
to the economy as a whole, Fannie Mae says a key downside risk for its forecast
is a loss in business and consumer confidence if U.S. trade policy becomes more
assertive and our trading partners retaliate. There are several occasions
upcoming where this could happen, including the ongoing NAFTA negotiations and
the August deadline for the investigation into China’s intellectual property
policies. There have already been tariffs imposed on steel and aluminum, lumber,
solar panels, and washing machines, and the Trans-Pacific Partnership is
launching without the U.S. on board.

 

 

The
Bureau of Economic Analysis (BEA) added an adjustment to wage and salary income
to reflect one-time bonuses awarded to some employees as a business response to
the recent corporate tax cuts. The BEA also estimated a decline in personal
taxes of 3.3 percent (regardless of whether employees adjusted their
withholding schedules), the biggest drop since the recession. This will boost disposable
personal income by the largest amount in a year, however Fannie Mae expects the
lion’s share of the income gains will be saved rather than consumed.



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