Fannie Mae's economists are predicting continued slow growth in the second half of the year.  The first half was marked by improvements in some economic sectors offset by declines in others.  The economists report said they continue to see "downside risks that outweigh possible upside surprises, as the economy limps along."

Weak growth in the second half of the year will be supported somewhat by consumer spending and, to a lesser extent, by business and residential investment.  Negatives include federal, state, and local governments, trade declines especially in the Euro zone and China, a slowdown in manufacturing, and business investment in equipment and software.

Consumer spending will remain the primary driver of economic growth with both nominal income and nominal disposable income increasing 0.3 percent while nominal spending rose 0.4 percent as did real consumer spending, the biggest increase in that category since February.

Despite the "challenging backdrop of the overall economy" Fannie Mae's economists expect the housing recovery to persist.  According to the August Fannie Mae National Housing Survey, consumer attitudes toward the housing market remain positive.  Even while the number of respondents who said the economy was headed in the wrong direction increased by 2.0 points to 60 percent, respondents who thought it was a good time to sell a home reached the highest level in over two years.   The survey also showed expectations for home prices over the next six months increasing for the tenth consecutive month.

Housing activity has improved substantially over the past year and housing supply and demand are now better aligned.  The inventories of both new and existing homes have been trending down but remain someone elevated over what is considered to be normal levels.  The supply/demand equilibrium has been driven more by factors such as a drop in new home supply because of the extraordinarily slow pace of homebuilding activity dating back several years and a slowing of foreclosures because of increased modification efforts than by a pickup in demand.

Increased construction activity has been concentrated in the multifamily sector where construction compares favorably to that in previous recoveries.  This construction has been caused by increasing demand for rentals because of credit tightening for mortgages, declining homeownership rates, and persons moving out of homeownership because of economic problems.  

Sales of both new and existing homes increased in July and year-to-date new home sales in July were 22 percent higher than a year earlier, the recent trough for such sales.  Existing home sales have increased 9 percent on an annual basis, the best showing since 2007. 

Several home price measures showed home prices continuing to climb during the second quarter and several indexes hit a seven-year high.  The economists said they expect price increases to slow in the fall and winter but if current trends continue they anticipate the market bottom was reached earlier this year.

Single family home starts are running 20 percent higher than last year although there was a dip in July.  Multi-family starts are up almost 40 percent from the same period last year.  Starts are projected to rise by 23 percent this year and as a result of this and increased home improvement spending residential investment contributed to the GDP during the first half of the year and is expected to continue modestly through the rest of 2012.

Home sales are expected to increase about 9 percent this year, consistent with predictions at the beginning of the year.  The increase in home sales is modest especially given the low interest rates but the next round of quantitative easily should allow mortgages rates to continue to support the housing and mortgage markets for the rest of the year, especially in the area of refinancing.

Mortgage originations are projected to rise to $1.58 trillion from an estimated $1.36 trillion last year with refinancing accounting for 69 percent of that total.  Single family mortgage debt will decline by an additional 1.2 percent by the end of the year, the fifth consecutive drop.