Despite the disruptions from several hurricanes and an expected drag from trade in the fourth quarter, Fannie Mae says it expects 2017 to finish with higher growth than its own economists predicted, even last month. The company's forecast for economic growth this year, contained in its December Economic Developments report, was bumped up by one-tenth point from the previous quarter to 2.5 percent due to an upgraded third quarter GDP estimate, up 0.2 point to 3.3 percent annualized, and an expected solid fourth quarter. GDP growth is expected to decelerate to 2.1 percent for all of 2018.
Of course, all bets must be hedged as Congress tries to reconcile the House and Senate versions of the tax cut, and Fannie Mae is doing so to theirs, saying they will wait to see the final bill before estimating its impact.
Jobs growth is solid, with 228,000 jobs added in November. The year-to-date monthly gain averaged 174,000 down from 190,000 in 2016. Residential construction employment was heartening, with healthy back-to-back monthly gains which means that residential might add to growth this quarter for the first time in three quarters.
The company's economists see housing activity as upbeat across the board according to early data for the fourth quarter. Housing starts rose in October to the highest level in a year, existing home sales posted the first back-to-back gains this year, new home sales jumped, nearing a decade-high, and pending home sales increased for the first time in four months, as sales rebounded from the hurricane disruptions.
Tight inventories continue to boost home prices. The CoreLogic house price index, which is used by the Federal Reserve Board to estimate the value of real estate assets, rose 6.9 percent annualized during the third quarter. Price growth helped boost home equity, which increased 8.5 percent annualized during the quarter. Homeowner equity rose to 58.6 percent of total real estate value, only 1.2 percentage points below the last peak at the end of 2005.
The yield on 30-year fixed-rate mortgages is expected to average 4.0 percent this year, two-tenths of a percent below where Fannie Mae had forecast it at the beginning of the year. The forecast for housing starts was also overstated; as of October, they were up 2.5 percent from the same period in 2016, but that was half the increase Fannie had predicted. While shortages of skilled labor and land were expected to be factors restraining building activity, the problem appears to have been more severe than anticipated.
Fannie Mae had predicted a 2.2 percent gain over 2016 numbers for total home sales, expecting that strong price appreciation would likely provide a headwind. That forecast was still slightly above where it appears total sales will end the year, up 2.0 percent.
The outlook for mortgage rates is for a gradual rise, with the 30-year fixed rate finishing out the fourth quarter of 2018 at 4.2 percent, compared to an apparent 3.9 percent at the end of this year. Total housing starts - single and multi-family will be up 5 percent next year and total home sales will increase by 3 percent.
Expectations for total single-family mortgage originations are little changed from the November forecast, they are predicted to drop about 12 percent this year to $1.81 trillion before declining an additional 5 percent to $1.73 trillion in 2018. The refinance share should drop from 37 percent this year to 31 percent in 2018.
The company sees passage of a tax bill has having both upside and downside risks to their forecast.
Doug Duncan, Fannie Mae's chief economist said in of the forecast, "The economy appears poised to finish 2017 on a cheerful note as fundamentals increasingly align with strong business and consumer sentiment. Domestic demand is building momentum, job growth is solid and broad-based, and consumer spending looks likely to strengthen. If enacted, tax reform should be a net positive for GDP growth next year, which we currently have pegged at a modest 2.1 percent in the absence of tax law changes. As expected, the Fed raised rates once more last week and, barring inflationary pressure, is expected to tighten two more times in 2018. Finally, the housing market continues its upward grind, as it struggles to balance strong demand and house price appreciation with inventory shortages and affordability concerns."