Fannie Mae's economists note that economic growth was very choppy during the second half of 2012 because of inventory swings and the same is expected of growth in the first quarter which is expected to accelerate to 3.2 percent.  Fannie Mae's April Economic and Housing Outlook says this trend is likely unsustainable as the change in inventories driving the growth is temporary. The tone of several key economic indicators such as the rather disappointing March jobs report and fiscal headwinds from tax hikes and sequestration should restrain growth.

A tailwind for the economy however will come from housing where the continued recovery and rising home prices will provide the most likely source of an upside in the forecast.  Residential investment added 0.4 percentage points to economic growth in the fourth quarter of 2012, the seventh consecutive quarter of positive or neutral contribution.  This pattern should continue through the year and housing's contribution to growth should strengthen further in 2014.

Most housing indicators were up including existing home sales and housing starts and housing permits suggest a substantial gain in homebuilding activity this year.  Builder confidence slipped in March but on net leading indicators "suggest the rebound in homebuilding activity is on firm footing."

Fannie Mae cited a recent National Association of Home Builders (NAHB) study that indicated that growing construction labor shortages are constraining residential construction and this is exacerbated by a lack of buildable lots and increased material costs.

Housing inventories remain well below long-term averages with some borrowers unwilling to list their properties for sale until prices firm up and others unable to do so because they are underwater.  The lean inventory coupled with rising investor demand spurred unexpected growth in home prices in 2012 and the declining share of distressed sales and increased short sales helped to support prices.  Some measures of home prices defied seasonality with the unadjusted CoreLogic Home Price Index carrying a fourth month streak of price increases into February with the strongest year-over-year increase in 7 years.

Continued rising prices should move some homeowners out of an underwater status and some may begin to put their homes on the market.  At present properties with the most severe negative equity, i.e. loan-to-value (LTV) rations of 120 percent or higher comprise slightly more than 10 percent of residential properties.  Even with reasonably strong home price gains these properties will remain underwater for the foreseeable future while those with LTV's between 100 and 120 percent are likely to regain positive equity by 2016.  This is about the same time Fannie Mae's Economic and Strategic Group expects housing-related activity to return to "normal."  

Rising home prices should also increase banks' willingness to make mortgage loans as they gain confidence that collateral will maintain its value.  The continued tightness of mortgage credit has remained one of the final barriers to returning to a more normal market.

Fannie Mae expects low mortgage rates to continue, with 30-year fixed rate mortgages rising gradually to 4.0 percent by year end.  Multifamily housing starts are expected to rise by another 19 percent in 2013 and single family starts to increase by 24 percent.  New Home sales are forecast to increase 18 percent.  The authors revised projected home prices upward and lowered the forecast of existing home sales.  While investor demand has been strong in many markets, purchase mortgage applications have not picked up substantially and the share of first time homebuyers has not been encouraging, accounting for less than one-third of total sales.

Purchase mortgage originations are expected to rise to $613 billion from the 2012 estimate of $530 billion and refinance originations to decline to about $1.0 trillion from $1.4 trillion for a refinance share of 62 percent.  Outstanding single-family mortgage debt should increase slightly after declining for five straight years.