Fannie's Housing Forecast Expects Silver Lining for Dreary New Home Sales and the Economy
Fannie Mae substantially revised its housing forecast
this month, especially as regards new home construction. The company's Economic and Strategic Research
(ESR) Group said it based its upward revision on "the breadth of positive
economic signals," including the
continued modest growth of the economy despite a variety of risks, ongoing strength
in labor markets and the resulting stability of consumer spending. Then, this month there was fresh evidence
that construction is poised to again be an engine of economic growth.
Fannie Mae's December housing outlook
is for homebuilders to expand production in reaction to continued strength in
labor markets and consumer spending, supportive interest rates, and waning
risks of a significant near-term economic slowdown. The ESR Group notes that
there was a fifth consecutive increase in housing starts in October (and a sixth,
for November, announced this week) and, along with a similar trend in permits,
signs of momentum going into the new year. The number of homes sold in October before
construction had even started indicates a growing backlog of orders.

Several large homebuilders have increased
their stockholder guidance for deliveries next year and have shifted toward
building more modestly priced homes. Further, the National Association of Home
Builders' (NAHB's) Housing Market Index showed a two-decade high in builder
confidence this month.
Based on those factors, Fannie Mae
now forecasts that new home starts next year will total 1.35 million. This 6.5
percent increase over 2019 is even more striking given that the 2020 forecast
last month called for just a 1.9 percent gain. The company sees single-family
starts rising 10 percent to just shy of one million units. Even with this
improvement it will likely take several years for new construction to address
the existing pent-up demand for additional housing, as suggested by a still-increasing
share of 25- to 34-year-olds living at home with their parents.
Sales of new homes fell modestly in
October but remained near the expansion high recorded (after revisions) in
September. While increased new home sales will coincide with the growing
construction activity, expect a lag in sales as homebuilders rebuild their
inventories of homes under construction and housing starts catch up to support
sales.
The new home share of total sales fell
sharply in the last recession but began to recover in May 2010. The current
outlook for the economy and interest rates suggest the share will continue to
rise with expected growth of 11.9 percent this
year, up 2.2 percent from the previous forecast, then rising by 5.0
percent next year, (a 5 point change) and 5.5 percent in 2021 up 4.7 points
from the earlier prediction.

The ESR Group calls its forecast for
existing home sales "muted." Those sales were up 1.9 percent in October but,
while demand is high, the earlier increase in inventories has now reversed.
Supplies dropped by 4.3 percent on an annual basis in October and were the
lowest for that month since Fannie Mae began tracking the stat in 1999. They
expect a modest decline in existing home sales during the first half of next
year but 1.5 percent growth for the entire year and 0.2 percent in 2021.
Delinquency rates indicate that the growth
in mortgage markets has not come at the expense of weaker underwriting. Both
multifamily and single-family delinquencies are at their lowest levels since at
least the turn of the century and rising home prices provide further support
for credit performance.
The decelerating rate of
appreciation appears to have reversed, and Fannie Mae expects it will remain at
or above 5 percent through the second quarter of next year then slow through
the remainder of the company's forecast horizon.
The outlook for purchase mortgage
originations in 2019 holds steady at $1.28 trillion, but higher expectations
for new home sales has led to a $74 billion upgrade in 2020 to $137 trillion in
purchase mortgages, offsetting the anticipated decline in refinance activity. Total
originations should grow 21.6 percent in 2019 to $2.15 trillion before
declining by 4.8 percent in 2020 to $2.04 trillion, with the refinance share
dropping from 40 percent in 2019 to 33 percent in 2020.
After deciding to keep the current
federal funds target in the 1.5 to 1.75 percent range at its December meeting,
the Federal Open Market Committee (FOMC) affirmed its belief that "the
current stance of monetary policy is appropriate" to sustain the
expansion. The ESR Group says the increasingly
high bar the Fed has set for undertaking further changes in the federal funds
rate, along with its anticipated improvement in economic conditions has led it
to cancel its prediction of one more rate cut early next year. While the 1.3
percent rate of inflation ties for the slowest in three years, they still
believe the Fed will hold the rate steady throughout 2020.
They expect the 10-year Treasury
yield to remain in the 1.8 percent range until late 2021 and fixed rate
mortgages to remain within a tight range around November's average of 3.70
percent for the foreseeable future.
The expected improvements in new
home construction and sales has driven an increase in Fannie Mae's predictions
for residential fixed investment (RFI) of 1.2 percentage points in the fourth
quarter of 2019 to 4.5 percent annualized and by 1.3 percent for the whole of
2019. RFI will continue to grow 3.4 percent in both 2020 and 2021, up from
previous forecasts of 0.3 percent and 1.1 percent respectively.
Real gross domestic product (GDP) is
expected to grow at an annualized pace of 1.8 percent during the fourth
quarter, two-tenths higher than Fannie Mae's previous forecast, and at 2.3
percent for the whole of 2019, a one-tenth percent upgrade. Real GDP should grow 2.1 percent in 2020, a two-tenths
of a point revision. The report adds that while it made small upward
adjustments into most forecast components, the outlook for RFI has increased
more substantially.
There are still downside risks to
the forecast, but the economists believe that the probabilities associated with
these risks have decreased. Trade talks appear to be nearing a resolution with
China, or at least a lessening of tensions. The 2019 global growth slowdown
appears likely to reverse next year, and recession fears prompted by yield
curve inversions and weak economic data in mid-2019 have abated to the extent
that some are crediting the Federal Reserve with a "soft landing."