Fannie Mae's economists are predicting that economic
growth will slow significantly in the fourth quarter to 1.6 percent. This downward
revision however is not as dire as it sounds. The company's October forecast
was looking for 1.7 percent growth in the third quarter due to an inventory
drawdown from the General Motors strike and general weakness in the
manufacturing sector. Instead, the third quarter growth in the real gross domestic
product (GDP) came in at 1.9 percent. They now see that expected inventory
drawdown materializing in this current quarter and that GDP for the year will
be 2.1 percent.
The simulative effects of the Budget Act of 2019,
improved business investment and continued strength in consumer spending along
with a temporary reprieve from trade tensions have moved Fannie Mae's Economic and
Strategic Research (ESR) Group to increase their full-year 2020 GDP forecast from
1.7 percent to 1.9 percent. Downside
risks include trade volatility, weakness in the manufacturing sector and global
uncertainty, specifically the Brexit-driven elections in the United Kingdom and political turmoil in
Hong Kong and South America.
Residential fixed investment grew by
an annualized 5.1 percent in the third quarter, making a positive contribution
to the economy for the first time in seven quarters. The growth came through stronger residential
construction, home improvements, and brokers' fees. The ESR Group says it expects this momentum to
continue at a more moderate 3.3 percent pace as construction activity and sales
remain healthy. Housing market activity however will continue to be constrained
by lack of homes for sale.
Sales of existing homes fell in
September, as was to be expected after two months of strong growth. Even with a
2.2 percent decline, the annualized rate of 5.38 million units during the month
helped third quarter existing home sales to rise to the highest level since the
first quarter of 2018. Pending sales
rose to a new 2019 high in September so sales are expected to increase in the
short term.
The ESR Group predicts that, in the
longer term, even as low mortgages rates and strong employment provide a
supportive environment, existing home sales may be nearing a plateau. The
current sales pace is near a range that they believe to be consistent with
recent historic age-adjusted homeowner migration patterns, so they do not expect
to see additional "catch-up" migration as happened earlier this
decade. This is a partial reason why the availability of existing homes for
sale continues to decline, limiting the potential for further growth. These inventory
constrains also continue to hold back household formations. Consistent with this view, purchase mortgage
applications, while volatile in recent months, appear to be leveling off, and
the Fannie Mae Home Purchase Sentiment Index (HPSI) has pulled back modestly
over the past two months as fewer respondents believe that the available
inventory makes this a good time to buy.
Also new home sales pulled back
slightly in September, they have also been improving. For the third quarter the
sales pace averaged 691,000 annualized units, the fastest pace since the
recession. The Census Bureau's Housing Vacancy and Homeownership Survey
reflected this increase in new home sales, with the nationwide homeownership
rate rebounding in the third quarter to 64.8 percent after declining during the
first two quarters of the year.

Single-family
construction is looking more encouraging.
There were 901,000 annualized starts during the third quarter, also the
highest of the expansion, and permits rose
in September for the fifth consecutive month.
The Housing Market Index published by the National Association of Home
Builders measured an improvement in homebuilder sentiment, increasing in
October for the fourth consecutive month to the highest level since February
2018. Nevertheless, a lack of both labor and lots remain a barrier and starts
are not growing adequately to match sales.
Much of the recent strength in new single-family home sales has come
from inventories that accumulated during last year's sales slowdown. That buildup is near depletion and the
inventory is now back within its historical norm. The economists expect sales to level off until
the supply of new homes gradually catches up and that regional differences in
market activity will reflect relative supply constraints. New home sales are likely to continue
trending upward in the South while remaining subdued in much of the West and
Northeast.

As sales have increased, annual home
price appreciation has firmed up following a year of deceleration. While it remains
relatively subdued compared to recent years, increasing price growth will
dampen recent affordability gains driven by the lower mortgage rate
environment.
Mortgage rates have stabilized
recently after falling for ten straight months. Freddie Mac's average 30-year
fixed mortgage rate rose 8 basis points to 3.69 percent in October, though it
remained over a full percentage point below year-ago levels. While mortgage
rates are not expected to increase significantly in coming quarters,
stabilizing rates will not provide the same support for home purchases that
declining rates offered.
Multifamily housing starts fell 28
percent in September, wiping out much of August's 41 percent surge and were
down 6.9 percent for the third quarter as a whole. These starts tend to be volatile, however, and
multifamily permits over the past two months have been among the highest
readings since the past recession. Multifamily
construction should remain strong in response to continued low vacancy rates,
renter household formation, and low interest rates.
The brighter outlook for home sales led
Fannie Mae to increase its forecast for purchase mortgage originations in 2019
and 2020 to $1.29 trillion and $1.30 trillion, respectively. Total originations
for 2019 are expected to rise 16.6 percent from 2018 to $2.06 trillion. Looking
ahead to 2020, they expect a decline in refinance activity and essentially flat
purchase activity to bring down total originations by 9.2 percent to $1.87
trillion, with the refinance share dropping from 37 percent in 2019 to 31 percent
in 2020.