Fannie Mae said it is maintaining its
forecast for 2016’s GDP at the same 1.8 percent it forecasted in July despite
the fact second quarter growth came in a 1.2 percent, more than 1.0 point lower
than the company’s forecast last month.
The company’s Economic and Housing Outlook report for August calls reports
of most of the components of the GDP in the second quarter “disappointing.” The exception was strong real consumer
Residential, non-residential, government, and
inventory investment spending all slowed growth, Residential investment fell
due largely to weakness in single-family home building which subtracted 0.2
percentage points from growth. This was
the first time housing has subtracted from growth since the first quarter of
The average annualized rate of growth in
the first half of the year came in at what the company’s economists, headed by
Senior Economist Doug Duncan, call an “underwhelming” 1.0 percent, however the
team did not revise its projection for growth for the year down from their
earlier one of 1.8 percent. They expect
that the surprise drawdown of inventory in the second quarter will probably
reverse and that growth in the second half will rebound to a rate about 0.5
percentage points greater than anticipated earlier, leaving the final year’s
number unchanged from earlier estimates.
Any concerns over some of the weak indictors
were mitigated by the strong July jobs report which, coupled with revisions to the
two previous reports, puts the average monthly job growth over the three-month period
at 190,000 compared to the trend of only 118,000 in May. The jobs report also indicates improving
income prospects with annual average increases in hourly earnings at a
seven-year high of 2.6 percent and an increase in the index of aggregate hours,
which reflects increases in both hours worked and the number of payrolls, up
0.5 percent for the month, the largest gain in a year.
The jobs report also gives ammunition to those
members of the Federal Open Market Committee who wish to hike rates in
September. Most members however appear
to wish to proceed more cautiously and inflation figures tend to support
them. The Personal Consumption
Expenditures (PCE) price index is still running below the Fed’s 2.0 percent
target. Fannie Mae believes the Global uncertainties
and anemic output growth also suggest the committee will not make a rate move
at its next meeting.
While some of the impacts of Brexit have
eased, the downward pressure on long-term Treasury yields has not. The Bank of England cut its key policy rate,
expanded its quantitative easing program and moved to provide £100 billion of
additional funding to banks to help ease the strain of lower short-term
rates. With a continued search on the
part of investors for positive yields, those for the long-term Treasury notes should
remain low. There is a concern that a
rise in the fed rate while other central banks are easing their monetary policy
could cause the dollar to appreciate significantly which could slow growth and
delay inflation from hitting that Fed target. Fannie Mae has not changed its prediction
that the Fed will hold rates steady this year.
Like Freddie Mac’s August forecast issued
earlier this week Fannie Mae’s sees mortgage rates staying at near record lows
for the rest of the year, averaging just 3.4 percent during the fourth quarter,
down a bit from its July forecast. This
should support the housing market through the year coupled with gradually
loosening of lending standards such as reported by was lenders in the Fed’s second
quarter Senior Loan Officer Opinion Survey.
Sales of both new and existing homes
performed better during the first six months of the year, with new sales up 11
percent and existing homes rising 5.0 percent from the first half of 2015. Leading indicators however do signal a
near-term slowdown; pending sales were flat in June and purchase mortgage applications
were also unremarkable in June and July
While home sales rose quarter-over-quarter
single family starts were down for the first time since the first quarter of
2015. It is expected that demand for
homes will be strengthened by solid job and wage growth but weak single family
home building and soft construction hiring are worrisome for the supply
side. Without some relief from new
construction, home inventories will remain tight and put upward pressure on prices
especially at the lower end of the market.
Given the strong home sales and the weak
homebuilding activity in the second quarter Fannie Mae revised its forecast for
both home sales for the rest of the year and single family starts for the next
four quarters. It now projects 2016
sales to be 4.0 percent higher than last year at 6.22 million and housing
starts to be at an annual rate of 936,000 by the third quarter of 2017 compared
to a projection of 785,000 for this current quarter.
Mortgage originations are expected to rise
from 2015 by 3.0 percent to 1.76 trillion next year, with an increase in
purchase originations more than offsetting a decline in refinancing. The refinancing share will drop 4.0
percentage points to 42 percent.
Household growth continues to recover from
the severe downturn it took with the recession and as a result the rental
vacancy rate is at its lowest level in decades.
Still, homeownership continues to decline and fell to 62.9 percent in
Q2, its lowest level in the second quarter since the Census Bureau began
tracking it in 1965. However, there are
finally some indications that older Millennials are becoming homeowners.