Consistency can be boring, but in crazy
times it can also be reassuring, even comforting. While they differ on the specifics, economists, at least
those in the housing industry, seem to be coming together with much the same
outlook and many of the same caveats for the next year or so. Fannie Mae’s Economic and Strategic Research
(ESR) team is among those who see economic growth slowing in a more-or-less
natural way, and housing’s current woes settling into stability. Unless….
ESR’s December Economic Developments forecasts the economy will finish the fourth
quarter with 2.6 percent annualized growth, down from 3.5 percent in Q3. Over the entirety of 2018, growth will have
been at a 3.1% rate, the fastest of the current expansion, slowing to 2.3
percent next year as the boost from federal fiscal policies wanes, the trade
deficit widens, and growth in business investment slows.”
The projection for business investment in
the 4th quarter has been downgraded, partially in response to
softness in core capital goods orders and lower oil prices and residential
looks to also drag on the economy given the forecasts for home sales and
housing starts. The report notes the
same key risks as seen in other forecasts; uncertainty about the country’s
trade negotiations with China, the direction of oil prices, and stock market
Consumer spending was the largest
contributor to GDP growth in the third quarter and so far, looks to be playing
a leading role in the fourth. Consumer
confidence dipped slightly in November due to dampening in its forward-looking
component, perhaps due to unease about trade tensions and stock market
Another big contribution to third quarter
results came from increases in local, state, and federal spending, with the
federal portion due largely to the Budget Reconciliation Act. Those positive
effects on GDP growth will probably peak this quarter then wane over the next
18 months before subtracting from growth in the second half of 2020.
Annual growth in
the PCE index, the Fed’s preferred measure of inflation, was unchanged at the
2.0 percent target for the second consecutive month in October while core PCE
inflation decelerated to 1.8 percent. Recent developments; lower oil prices and
a stronger dollar, should put downward pressure on inflation.
The recent inversion between the 2-year
and 5-year Treasury yield curves, stock market volatility, and weakness across
the housing industry have sparked speculation that the Fed may pause its rate
increases in 2019. Fed Chairman Powell recently
noted that “Interest rates are still low by historical standards and remain
just below the broad range of estimates of the level that would be neutral for
the economy.” This seems a departure
from an earlier comment that interest rates were “a long way from neutral.” He
also acknowledged that the “economic effects of our gradual rate increases are uncertain
and may take a year or more to be fully realized.” These statements suggest
that the FOMC is likely to grow increasingly data-dependent during its
The outlook for housing is a moderate
one. With the caveat that inflation
remains in control, the ESR team expects both mortgage rates and home sales to
stabilize. The increase in inventories
should help moderate home price appreciation and a slowdown is already showing up
in some indices. For example, the
Federal Housing Finance Agency’s Purchase-Only Index was an annualized 6.0
percent in September, the slowest since January 2017. Consumers are expecting
less as well; the net share of respondents to Fannie Mae’s November National
Housing Survey expecting further price increases dropped to the lowest reading
since October 2016.
Existing home sales were slightly higher
in October, but new home sales fell sharply. Pending home sales, which represent contract
signings of existing homes and precede closings of existing homes by a month or
two, fell by 2.6 percent in October. Year-to-date
sales are down overall because of the increase in mortgage rate which soared by
92 basis points in October compared to a year earlier. Those rates then
stabilized in November, rising only 4 basis points over the month, to 4.87
percent and have declined this month. The
December 13 Freddie Mac report put the 30-year fixed-rate at 4.63 percent. In September, before this volatility began,
the National Association of Realtors Affordability Index was down 8.4 percent
compared to a year earlier.
Applications for home purchases fell in
October as rates rose, but recovered in November, rising by 2.5 percent, as
rates flattened. Fannie Mae projects
that purchase mortgage originations will increase by more than 2 percent next
year, but refinancing will drop by nearly 11 percent. The result will be a small decline in total
originations to $1.605 trillion.
While housing demand has moderated,
for-sale inventories have risen, especially for newly constructed homes. The existing home inventory grew 2.8 percent
year-over-year in October compared to 18.0 percent for new homes. Translated into months supply existing homes
went from 3.9 months in October 2017 to 4.3 months and new homes from 5.9 to
8.1 months. A six-month supply is considered the long-term average.
Residential construction continues to be
weak; single-family starts fell 1.8 percent in October and are 1.5 percent
lower than a year ago and permits were also down. As builders look at the
growing inventory, they may not be inclined to pick up the pace. The National
Association of Home Builders/Wells Fargo Housing Market Index (HMI), a measure
of builder confidence, dipped 8 points in November to a reading of 60, the
lowest since August 2016.
To round up the ESR team’s latest
fixed investment will fall in the fourth quarter, the fourth consecutive
sales will be little changed next year, but single-family construction will grow.
prices will rise 5.4 percent this year and 4.1 percent in 2019.
rates will stabilize in 2019, allowing potential homebuyers time to adjust to
the higher rate levels and should, in combination with a slower pace of house
price growth, support affordability.
labor market should remain solid as job growth is expected to keep the
unemployment rate near historically low levels which is positive for income
purchase mortgage originations forecast has been lowered by $4 billion this year
and $11 billion next due to weaker-than-expected incoming data for average home
sale prices and the downward revision of existing home sales and single-family
housing start forecasts.
continue that this year’s purchase originations will be lower than last, ($1.17
trillion vs $1.18 trillion), with a recovery into 2019 and 2020 ($1.19 trillion
and $1.25 trillion, respectively). Refinance
originations forecasts for 2018, 2019, and 2020 have been revised slightly higher
based on incoming data and lower assumptions about interest rates, but it will
still decline over the forecast horizon, dropping from $461 billion in 2018 to
$413 billion in 2019 and $404 billion in 2020.
the slowdown in job creation in November, labor market and broader economic
conditions remain solid and the pace of inflation is at or near the Fed’s
target. The team still expects the Fed to raise rates at its meeting next week
and twice more next year.