Fannie Mae said today that the third quarter economy was better than expected with inventory buildups that doubled from the second quarter, the fastest accumulation since the first quarter of 1998.  This indicated optimism from business, but if demand doesn't live up to expectations businesses will be forced to cut back on production and quarterly GDP growth will slow.

Fannie Mae's economic forecast for December says some clarity is beginning to emerge in Washington with the government shutdown ended but the company's economists express concern about the possibility of another shutdown in January as well as a battle over the debt ceiling in February.  Yesterday's adoption by the Senate of a FY 2014 budget ends the first concern, but the debt ceiling imbroglio remains a threat.  The report's prediction that, based on the November jobs report the Federal Reserve would soon start tapering its asset purchases was already borne out by the Fed's announcement to that effect yesterday.  

The momentum of the housing market recovery has slowed since the spike in mortgage rates in May. After posting 28 straight months of annual increases, pending home sales were lower than the same month a year earlier in both September and October and October was the straight month of monthly declines.  New home sales however rebounded sharply, surging more than 25 percent.  Like pending sales, new home sales reflect contract signings rather than closed transactions.  Existing home sales, which are closed transactions, declined in October for the second straight month.

Fannie Mae's economists, Doug Duncan, Orawin T. Velz, and Brian Hughes-Cromwick call the performance of single-family homebuilding the "most disappointing" aspect of the housing recovery this year.  After jumping to the recovery peak of 652,000 units in February, single-family housing starts have been trending down.  Data on starts is not available after August because of the government shutdown but recent housing permit data suggest that single-family starts "may remain lackluster in the fourth quarter."  However, multifamily permits posted a double-digit increase in October for a second straight month, sending total permitting numbers to a recovery high.

The tight availability of acquisition, development, and construction (AD&C) loans may be one thing holding back a stronger recovery in homebuilding.  "Although lending conditions have been improving gradually, according to the survey by the National Association of Home Builders (NAHB), the current stock of residential AD&C loans still stood about 80 percent below its peak reached during the first quarter of 2008. The NAHB survey also indicated that land development loans face tighter lending standards than residential construction loans," the report says.



The economist concluding that all housing activity has posted significant year-to-date gains and they expect continued improvement in activity in 2014, although at a varying pace.  They also call the performance of home price measures so far in 2013 impressive. 

The annual increase in the CoreLogic index was 12.5 percent through October (11.0 percent excluding distressed sales), compared with 8.5 percent and 13.3 percent for the FHFA purchase-only and the Case-Shiller 20-city composite indices, respectively, through September.

The three economists make the following predictions for the housing market over the next months.

  • House prices at the national level will move higher as the months' supply measures have remained below historical norms. The shadow supply has been improving which will reduce downward pressure on home prices.


  • While prices will go up, the pace of appreciation should moderate, partially because of declining investor, especially institutional investor, demand.



  • Single-family mortgage originations will decline approximately 15 percent to $1.82 trillion this year, with the refinance share dropping 10 percentage points from an estimated 72 percent in 2012. Total mortgage originations should drop another 28 percent in 2014 to $1.32 trillion, with the refi share declining further to 39 percent- the lowest since 2000. For mortgage debt, the latest data from the Fed showed that total single-family mortgage debt outstanding rose 0.5 percent annualized in the third quarter. It should post a slight drop for all of 2013 before rising modestly in 2014-the first rise in seven years.
  • Mortgage rates continue to be forecast as rising to 4.9 percent by the end of 2014.
  • Refinancing as a share of mortgage originations will decline below 50 percent this quarter, signaling that the market has finally switched from a refi to a purchase market.