Fannie Mae’s Economic and Strategic Research (ESR) group says it expects the
U.S. gross domestic product (GDP) to decline by 35 percent (annualized) in the
current quarter. The loss of 4.8 percent in the first quarter, the largest
decrease in six years exceeded Fannie Mae’s estimate of -3.3 percent because of
a larger than anticipated slowdown in personal consumption expenditures (PCE), 40
percent of which, ironically, came from a decline in spending on healthcare
because of delays or cancellations in elective surgeries because of the pandemic.
The plummeting growth expected in the second quarter will improve in the
second half of the year, with healthcare at that point providing outsized
support. As restrictions and social distancing measures are relaxed, the
economists believe that an elevated savings rate, supportive monetary and
fiscal policies, and pent-up demand will start to drive the economic recovery.
Full-year 2020 GDP is expected to contract 5.3 percent, while 2021 growth is
forecast to be at 5.2 percent.
The group sees many unknowns contributing to both downside and upside risks
to their forecast. One is the way consumers will react as the economy reopens.
Will they prefer to remain under quarantine in large numbers, limiting the upside
potential for rebounding consumption? This could increase the magnitude of
bankruptcies and permanent business closings. Another downside risk is the
potential for a second, longer lasting or more severe than anticipated outbreak
of the coronavirus later this year, possibly leading to renewed social distancing
measures. Together, these risks could lead to a lower growth path.
The upside scenario is one in which the rebound from the coronavirus-driven
declines in the first half of the year is more pronounced and rapid than currently
expected. Fannie’s baseline forecast assumes that GDP will not return to its
pre-pandemic level until late 2022 or early 2023. However, if consumer and
business confidence surges following the reopening of the economy and a
combination of increased testing and coronavirus therapies emerges, a second
round of illnesses may not dampen the recovery and a return to pre-coronavirus
levels of GDP could be realized sooner.
Fannie Mae calls housing “a bright spot” in the first quarter. Residential
fixed investment posted its largest annualized gain since 2012, but pandemic disruptions
are now severely impacting the sector. Housing activity appears to have slowed
earlier than expected; April existing sales fell 8.5 percent over March. Given
that sales are recorded at the point of closing, the decline reflected contract
signings in February or even January, prior to the March slowdown. It is
plausible that some transactions were delayed into April as coronavirus-related
distancing measures disrupted the buying process, but many deals may have
fallen through at varying stages.
Some high frequency weekly data suggest a recent, modest firming of home
purchase activity, but for the second quarter sales will probably decline about
31 percent. Low interest rates will persist, with the 30-year potentially
falling below 3.0 percent late in the year. This, combined with expectations
for recovery in employment, should support housing, but the year will probably
see a 15 percent decline in sales compared to 2019.
According to Corelogic, new listings of single-family homes for sale were
down 40 percent from April 2019 as would-be home sellers decline to list their
homes due to infection concerns or belief that market conditions are
unfavorable. The tightening of housing supply will likely help soften the
downward pressure on home prices, even as sales volumes decline. Realtor.com
says many sellers have been reluctant to cut prices, opting to take their homes
off the market and wait for social-distancing measures to ease before
considering price cuts.
In the long run, the limited supply of homes available, especially in the
starter-home segment, should continue to support home building but it will
probably decline sharply in the current quarter. Single-family housing starts
fell 17.5 percent in March, to the lowest level in nearly a year, and
residential construction employment declined in April. Similarly, new sales were
off by 15.4 percent in March, the largest monthly decline since July 2013.
The National Association of Home Builders’ Housing Market Index dropped
sharply, posting the largest decline in builder confidence in the survey’s
35-year history. Builders’ current outlook and expectations for the next six months
both fell to the lowest levels in nearly 8 years, and the Federal Reserve
reported tightening of lending standards on construction and development loans.
However, as is the case with recent high frequency data, some homebuilders have
indicated an uptick in buyer interest in recent weeks. Because of prior data
revisions, Fannie Mae has revised its forecast for new home sales and housing
starts for the quarter; single-family starts will decline 10.1 percent and new
home sales by 14.6 percent.
Multifamily construction starts fell 31.7 percent in March and Fannie Mae
expects they will be down more sharply this quarter than those for
single-family homes. It forecasts a 43.5 percent 2nd quarter retreat
and 10.5 percent for the whole year
Residential fixed investment in the second quarter is expected to fall over
50 percent on an annualized basis with some recovery in the second half of the
year. It probably won’t return to pre-crisis levels until 2022. A weaker job
market and tightening of lending standards for homebuyers and builders relative
to those at the start of 2020 will likely continue to be a drag on activity,
even after virus concerns subside.
The Federal Reserve says banks reported a net tightening in lending
standards for residential mortgages during the three months that ended in April,
only the second quarter in six years that has happened. Jumbo loans, in
particular, were affected while government loans were the only category with net
loosening. Despite this tightening, banks reported strong demand for mortgage
While the ESR Group expects mortgages rates to fall even further, heightened
uncertainty about job security and disruptions to household wealth may lead
potential homebuyers to be more wary of substantial, long-term financial
commitments such as mortgages. It is also unclear at this point to what extent
the use of forbearance agreements will limit future mortgage demand. Their forecast
for purchase mortgage originations is largely unchanged from last month at a
2020 volume of $1.1 trillion, a decline of 15 percent from 2019, corresponding
to the expected decline in home sales and starts. Those volumes should recover
to $1.3 trillion in 2021 as housing activity improves.
Meanwhile, their refinance originations forecast increased, with volumes reaching
$1.5 trillion, $119 billion higher than the previous forecast and a level
similar to 2012, when the last refinance boom occurred. While refinance
applications have fallen of late (down 22 percent in April, according to the
Mortgage Bankers Association), they remain at elevated levels; therefore, we
expect the pipeline of refinances to continue in the near future. Refinance
originations will decline to $1.2 trillion in 2021, unchanged from last month’s