Tax Cut Gains Forecast to Fade Away in 2019

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Fannie Mae is backing down slightly on its economic
forecast for the remainder of 2018.  The
first quarter GDP growth of 2.3 percent was the slowest in a year, down from
2.9 percent a year earlier.  The
company’s economists, led by vice president and chief economists Doug Duncan,
say they expect growth to pick up later in the year but the economic boost from
last December’s Tax Cuts and Jobs Act and this February’s Bipartisan Budget Act
of 2018, will fade next year and the labor market will tighten more than
previously thought.  The earlier
full-year 2018 forecast remains at 2.7 percent, but the company is lowering its
projections for 2019 by two-tenths to 2.3 percent.                                                                                                                                           

They see substantial downside risks to their
forecast
, especially the rising price of oil.  Crude prices have risen by about $11 per
barrel since December to reach $71. Rising gasoline prices decrease disposable
income and are therefore likely to negate some of the increase in disposable
income from the tax cuts. They also may push inflation higher, leading the Fed
to pick up the pace of interest rate hikes. 
The administration’s protectionist trade policy is also a barrier growth.

The
economists call first quarter housing activity “lackluster.”  Consequently, real residential investment was
not a contributor to the GDP. 
Homebuilding activity was mixed, with multifamily starts posting the largest
quarterly increase since the second quarter of 2016
, while single-family starts
suffered a slight decline. New home sales increased while the sales of existing
homes, which make up 90 percent of the total, fell during the quarter.

 

 

The inventory of existing
homes
for sale has been down on a year-over-year basis for nearly three years, constraining
sales while boosting prices. Appreciation, according to the major indices was
running between 6.3 percent and 7.2 percent in February.

Leading indicators suggest an improving outlook for
home sales going into the spring selling season: pending home sales rose in
March for the second consecutive month and purchase applications increased in
April for the second time. The company continues to expect total home sales to
rise about 2.5 percent this year. 

The Census Bureau’s Housing Vacancy Survey (HVS) put the
homeownership rate at 64.2 percent in the first quarter, unchanged from Q4
2017, but higher on an annual basis for the fifth consecutive quarter. In addition,
the annual increase in owner households exceeded one million for the third time
in four quarters and significantly outpaced the drop in renter households,
which posted a year-over-year decline for the fourth consecutive quarter.

 

 

The HVS also showed the for-sale vacancy rate down by two-tenths
compared to a year ago, at 1.5 percent it was the lowest for a first quarter
reading since 2001. The rental vacancy rate was unchanged from a year ago,
remaining at 7.0 percent. 

Fannie Mae updated its estimated mortgage purchase
originations for 2017 by $42 billion and lowered refinancing originations by
$58 billion. The revisions, based on benchmarking of Home Mortgage Disclosure
Act Data, resulted in a net decline in total mortgage originations of $16
billion to $1.83 trillion in 2017.  The refinance
share was revised lower by 2 percentage points from the prior estimate to 36
percent.

Total mortgage originations are expected to decline this
year by approximately 9 percent
from 2017 to $1.67 trillion, as a 26 percent
drop in refinance originations outpaces a 1 percent rise in purchase
originations.  The refinance share is
projected to fall 7 percentage points from 2017 to 29 percent.



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