Despite a slowing rate of economic growth in the second estimate for the first quarter, Fannie Mae's economists are holding firm in their forecast for the remainder of the year. The second preliminary estimate for the quarter was for growth of 2.2 percent, down from the initial estimate of 2.3 percent and off by 0.7 point of the expansion in the fourth quarter of 2017. Fannie Mae's Economic and Strategic Research Group however continue to look for 2.7 percent growth this year, followed by 2.3 percent in 2019.
They hedge their predictions with both upside and downside risks. Among the former are potential acceleration of business investment. There are indications of this in the newest report by way of upward revisions to investments in structures, equipment, and intellectual property products. A second upside risk is an evident lessening of household conservatism resulting in stronger consumer consumption. Downside risks include a faster rate of interest rate hikes from the Fed and uncertainty about trade policy.
As expected, the Federal Reserve's Open Market Committee (FOMC) raised rates again in June, upping the federal funds rate by a quarter point to a range of 1.75 to 2.0 percent . They also updated economic projections to indicate strong growth, lower employment rates, and higher inflation rates this year than they had indicated in March. They dropped hints of a possible fourth rate hike this year, however Fannie Mae is sticking to its prediction of only three.
Fannie Mae calls housing activity in April "downbeat." Demand for homes appears strong with homes selling quickly, an average of 26 days, the shortest period since tracking began in 2011, but inventory shortages continue to plague the market. House listings have remained below year-ago levels for nearly three years. The tight inventory continues to boost prices as well. CoreLogic Case-Shiller, CoreLogic, and FHFA home price indices all showed strong increases in the first quarter, pushing national annual gains to between 6.4 percent and 6.9 percent depending on the data source.
While the rising prices have begun to affect the affordability home purchases for many, it has increased household net worth among those who already own. Aggregate net worth reached $100 trillion for the first time in the first quarter as gains in home equity and other components compensated for the first drop in stock market wealth in 10 quarters. The home equity component posted its largest gain in almost five years, giving the average homeowner an equity share of 59.7 percent, the highest since the end of 2005 and a big rebound from the low of 36.2 percent 9 years ago.
New home construction is getting strong support from the lean inventory as well as a strong labor market and a growing pool of households of homebuying age, but Fannie Mae says rising costs are putting increasing pressure on costs. The median size of new homes has been declining as builders try to court entry-level buyers, that effort is meeting strong headwinds including the record-high cost of lumber and a shortage of available lots. Finished lot price as a share of the sales price has rising since 2015. Construction industry unemployment was at its lowest level in May, 4.4 percent, since the Labor Department began tracking it nearly two decades ago which is putting upward pressure on wages.
The economists are bearish in the near-term outlook for home sales. Pending home sales were down in April, purchase mortgage applications dropped in May, and increasing mortgage rates are adding to affordability challenges. They lowered their forecast for existing home sales to a 2.0 percent increase in 2018 compared to 2017, down from 2.5 percent in the prior forecast but are raising their purchase mortgage origination forecast as they see fewer homes being sold for cash.
Total mortgage originations are expected to fall about 6 percent from 2017 to $1.71 trillion in 2018, with a refinance share of 28 percent, compared with 36 percent in 2017. Single-family (1-4 unit properties) mortgage debt outstanding in the first quarter of 2018 climbed to the highest level since the third quarter of 2010, but the quarterly increase was the smallest in two years.