Troublesome Housing Sector Drags Down Economic Projections


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Fannie Mae’s Economic and Strategic
Research Group (ESR) upped their projection for economic growth slightly, to
3.1 percent this year, but say housing will probably have little to do with it.
 The first estimate for the third quarter
GDP came in at an annualized 3.5 percent, off a bit from 4.2 percent in the
second quarter.  Consumer and government
spending and a building up in private inventories contributed to growth while
business fixed investment was soft, residential fixed investment was down for
the third straight quarter and the trade deficit widened.  

The ESR, in its November Economic Developments, says they expect solid
gains in employment and wages to continue, but growth will slow to 2.3 percent
next year due to further increases in short-term interest rates and the
diminishing effects of last February’s fiscal stimulus.  They see some downside risks if business
investment slows further or consumer confidence loses ground.  Either could be triggered by a too aggressive
Federal Reserve approach to increasing interest rates or equity market reversals
and they stress the possibility of trade issues as a downside risk.

Residential fixed investment should grow
modestly as the industry recovers from natural disaster disruptions – hurricanes
in the Southeast and wildfires in California – and from the impact of rising
mortgage rates.

Then there is housing.  The sector has continued to struggle, with
sales of existing homes down for the third consecutive quarter and for the sixth
consecutive month in September, and new homes posting the sharpest quarterly
drop in five years.  Prospective buyers
are contending with rising prices and interest rates
and low inventories of
available homes while weather has been a factor with hurricanes in the South
and wildfires in the West. 

Mortgage rates averaged 4.57 percent in
the third quarter, the highest quarterly level in more than seven years, and
existing home listings were considered to be a 4.3 supply at the current sales
rate; six months is considered a balanced market.  New home inventories did cross that line for
the first time since 2011, growing to a 6.6-month supply in the third quarter.  While inventories of homes have increased
recently, the growth has been concentrated in California; remaining constrained
in much of the rest of the country.   



There was good news for the housing sector’s
long-range future in the Census Bureau’s Housing
Vacancy Survey for the third quarter. 
Household growth increased by 1.56 million year-over-year and renter-occupied households posted the first year-over-year
increase since the first quarter of 2017
. Owner occupied households
posted the 13th quarter of annual growth, up 1.5 million. The homeownership rate has increased on an annual basis
over seven consecutive quarters, reaching 64.4 percent in the third quarter.  The report calls household formation and
headship rates key determinants of housing production and a challenge for the
construction industry.



Speaking of
which, single-family housing starts fell during the third quarter as rising
rates and construction worker wage increases contributed to builders’
costs.  Prices of softwood lumber have
dropped by about 27 percent from their record levels in June, helping a
bit.  Weather was probably a factor here
as well; the 0.9 drop in single-family starts in September was driven by a 6.8 percent
plunge in the South.  Multifamily starts,
always volatile, also pulled back in September.

Fannie Mae
says its presumptions about 2019 “are premised on the view that mortgage rates
will recede
as a headwind” and when coupled with its overall outlook or the
economy, they expect sales will stabilize in 2019.  This will get an assist from moderating home
price appreciation.  The anticipated
end-of year average for 2018 of 5.4 percent (down from 6.9 percent growth in
the 2017 FHFA Purchase-Only Index) will ratchet down to 4.1 percent next year,  

The operating environment for mortgage lenders will remain
challenging.  The ESR revised its estimates for purchase
mortgage volumes from their earlier forecast by about 1.0 percent for this year
and 2.0 percent next year but expect volume to pick up by almost 3.0 percent in
2019.  The result was a $11 billion
decline in their 2018 forecast to $1.624 trillion and a $21 billion revision to the 2019 forecast to $1.603

In other areas, the 250,000 new jobs
created in October was a strong improvement over the 118,000 jobs in September,
putting the year-to-date number above 2.1 million. Unemployment held steady at
3.7 percent.

Even as average hourly earnings accelerated
in many sectors, personal consumption expenditures (PCE) indicate that inflation
pressures are manageable.  The annual growth
in the PCE index slowed for the second month to 2.0 percent in September while
the core PCE inflation was at 2.0 percent for the fifth month.  The recent decline in oil prices and the
stronger dollar add to the downward pressures. 

The Fed, at their meeting this month, left
the fed funds rate unchanged at a 2.0 to 2.25 percent range. The Fed considers
the risks to its economic outlook to be “roughly balanced,” and still expects
further gradual increases in the target range for the federal funds rate.”

in the stock market has intensified; moves at or above 1.0 percent up or down
in the S&P 500 Index occurred on 10 trading days in October compared with
none in September. For all of October, the S&P 500 Index fell 6.9 percent,
largely reversing its 2018 gains.  The
report says that sustained declines in the stock market pose downside risks to its
outlook as a contraction in households’ financial wealth could lead consumers
to be more cautious. 

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