Bright Economic Outlook Muted by Housing Data


Fannie Mae’s Economic and Strategic
Research (ESR) group is still expecting that economic growth will “likely” be
in the third quarter, but they are otherwise hedging their bets.  In their October Outlook, the economists said the lower job growth in September does
not alter their view that the labor market is strong, but GDP growth has
probably slowed from its second quarter pace, partly reflecting a deceleration
of product investment and consumer spending.

The surge of soybean exports that tried to
get ahead of tariffs has subsided and with a strengthening dollar, the trade
deficit has probably widened, and residential fixed investment is probably also
down, extending that decline into a third straight quarter. Real estate sales
commissions are part of that calculation and home sales have declined as
interest rates have risen.

The outlook for rate hikes next
year looks a trifle fuzzy.  Fannie
Mae  says with the solid economic growth
and inflation appearing to stay around the 2 percent level the Fed prefers, the
predicted December increase seems to be on track.  However, they add that Fed Chair Jerome
Powell and other members of the Federal Open Market Committee (FOMC) have
repeatedly said they are shifting toward a risk management framework that seeks
a balance between removing accommodation too quickly, which might end the
expansion prematurely, and risking higher inflation. At present it appears
that, given there is another 25 basis point increase this year, that FOMC
members are evenly split among expecting two, three, or four rate hikes next

The ESR group however says, “If economic
conditions evolve as expected, we anticipate that the FOMC will raise its
short-term policy rate three more times, once more by the end of this year and
then twice in 2019. Since rates on many residential construction loans are
typically tied to the bank prime rate, tightening monetary policy will also
likely raise builders’ borrowing costs, adding to the factors inhibiting a
much-needed increase in single-family housing production.”

Existing home sales were flat in
August after declining for the prior four months as homebuyers adjusted to
higher mortgage rates and tighter inventories in many metros.  They declined again in September per the
National Association of Realtor’s report released after the Fannie Mae report
was written.

The Outlook lays out a laundry list
of somewhat negative housing indicators:

  • Fannie
    Mae’s Home Purchase Sentiment Index (HPSI) was lower in September, partly
    reflecting an increase in the net share of respondents expecting mortgage rates
    to “go up” over the next 12 months rather than down.
  • The
    National Association of Realtors’ Pending Home Sales Index declined nationwide
    in both July and August.
  • The
    index of purchase mortgage applications from the Mortgage Bankers’ Association
    fell across the entire third quarter.
  • Fannie
    Mae’s Mortgage Lender Sentiment Survey (MLSS) also reported an erosion in
    purchase mortgage demand in the third quarter of 2018, and lower demand may be
    contributing to mortgage lenders’ net negative outlook as they face
    “competition from other lenders.”

In view of these growing downside
risks, Fannie Mae lowered its forecast for home sales over the remainder of
2018, and into 2019 as existing home sales are now expected to be flat next
year.  They expect total home sales to
rise next year as rates stabilize, but that growth will be muted.

In light of the higher rate
environment and weak incoming sales and mortgage application data, the company
also downgraded its projections for purchase and refinance mortgage
activity.  The purchase origination
forecast has been lowered by about 2 percent for both this year and next, to
$1.181 trillion and $1.224 trillion respectively. The forecast for refinance
volume has been revised down 3 percent to $454 billion in 2018 and by more than
8 percent in 2019, to $401 billion.

starts, a key component of real residential fixed investment, rose in both July
and August; however, due to a steep decline in June, single-family construction
on average across the third quarter is likely to be below its average level in
the second quarter. After increasing in the years following the Great
Recession, the average size of single-family homes began to decline in 2016,
further suggesting that builders are producing a larger proportion of smaller
homes due to the geographic spread of employment to areas with lower land
costs. The cost savings from the smaller size has been offset as the price per
square foot for construction rose to a new high in 2017

Multifamily starts have swung from month
to month, with the 92,000 unit increase in August largely reducing the aggregate
77,000 unit decline in June and July.  Production of multifamily housing is running
at an annual rate of 406,000, a robust number, and demand for multifamily
rental units remains strong even though rents have slightly declined.  While they appear to have increased nationally
in the third quarter by 0.75 percent to an ask of $1,267, about the same
increase as a year earlier, that is about half the size of the 2018 second
quarter growth.

For the economy as a whole, the ESR group
says it appears to have grown faster in the third quarter than they projected
last month, but their full-year growth expectations for 2018 and 2019 remain
unchanged at 3.0 percent and 2.3 percent, respectively.

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