Fannie Mae has upgraded its forecast for the third
quarter gross domestic product (GDP). It now expects growth at an annualized pace
of 30.4 percent, up from the 27.2 percent the company’s economists predicted in
August. They say that growth has clearly slowed from the days soon after the business
shutdowns and orders to shelter in place were gradually lifted by states and cities
in May and June, but more recent data points to a continued recovery.
It was originally thought that personal consumption
expenditures would fall off significantly as expanded unemployment benefits expired,
but they rose 1.6 percent in July, and early data for August suggest that
growth continued. Auto sales, one component of the PCE, rose 4.5 percent and credit
and debit card transactions appear to have increased as well. There are also
indications that business and housing investment will grow at a faster pace in
the third quarter than previously thought.
However, while prospects appear slightly rosier for
this quarter, the economists have downgraded their GDP growth estimate for the
fourth quarter to an annualized 6.2 percent from 8.7 percent in their last
forecast. This is based on both a smaller remaining recovery gap and the fading
prospect for an additional round of stimulus before the election.
Next year’s prospects will probably
be limited again by pandemic concerns. Hospitality and travel could take
several years to return to normal and “the pace of growth [will] decelerate
meaningfully in 2021, as recovery in sectors less harmed by social distancing
measures nears completion.”
The housing data that has come in
since the last Fannie Mae forecast continues to demonstrate a V-rebound which is
helping to drive the broader economy. Existing home sales in July were up month-over-month
by 24.7 percent to an annualized pace of 5.86 million units, the highest since
2006. The July blowout will probably not be followed by the predicted pullback
in August as pending home sales rose 5.9 percent in July, setting the stage for
strong closings in 30 to 45 days and purchase mortgage applications were also
as high in August as July. Construction measures were also strong; July housing
starts were the highest since February.
Pent-up demand from the spring,
historically low mortgage rates, and what appears to be an increased interest
in moving to suburban areas in at least some metro areas is fueling strong home
While the July pace of sales was in
line with Fannie Mae’s expectations, the continued strength in August has
exceeded them. The company, however, says the pace of sales isn’t sustainable given
the lack of inventory. New single-family listings have grown modestly on a year-over-year
basis, but the growth is much slower than purchase demand. The months’ supply
of homes for sale as a ratio of sales fell to 3.1 at the end of July, down 26
percent from a year prior and to the lowest level for the month of July in the
history of the series. The forecast for existing home sales has been increased
for the remainder of the year, but the fourth quarter will probably be down somewhat
from the current quarter.
Extremely limited inventory of
existing for-sale homes will likely continue to bolster demand for new homes.
Single-family housing starts rose 8.2 percent in July but that was outpaced by
new home sales which jumped by 13.9 percent to 901,000 annualized units, the
highest level since 2006. Even with a strong recovery in construction, supply
is not keeping up with demand. The months’ supply of new homes for sale where
construction has been started as a ratio of sales fell to 3.0 in July, tying
the lowest level since 2004. Given these conditions the forecast starts has
been increased to over one million annualized and for the full-year total to
rise 5.1 percent above 2019 levels.
Fannie Mae now forecasts residential
fixed investment (RFI) in the third quarter to grow 48.7 percent annualized and
has upgraded its forecasts for both new and existing home sales. For 2020,
total home sales are now expected to be 1.3 percent higher than in 2019.
The lack of inventory of for-sale
homes is putting upward pressure on home prices and threatens to negate the
affordability benefits from low mortgage rates. The CoreLogic National House
Price Index showed an acceleration in annual house price growth to 5.5 percent
in July, up 1.2 percentage points from June and Realtor.com says the median
listing price the first week of September was 10.8 percent higher than a year
Estimates for purchase mortgage originations
were increased consistent with recent, robust housing data as well as continued
strength in acquisitions and securitizations data. They should grow 8.9 percent
in 2020 to $1.4 trillion, $112 billion higher than last month’s forecast. Purchase volumes should grow 3.3 percent in
2021 as decelerating home price growth limits additional volume.
Refinance originations were also
revised upward, now totaling $2.4 trillion in 2020, a full $350 billion higher
than last month’s forecast. This revision was driven by stronger-than-expected
securitization and application activity, though some of this volume are
refinance originations being pulled forward so estimates for next year have
been lowered modestly. The company still expects that the low-rate environment
will support refinance demand over the forecast horizon. At the current
interest rate of 2.86 percent, nearly 69 percent of outstanding first-lien loan
balances may have at least a half-percentage point incentive to refinance.
Total mortgage originations should reach $3.87 trillion, which would be the
highest nominal dollar annual total since Fannie Mae began tracking it in 1988.
Most short-term interest rates
should remain low for the foreseeable future given the Federal Reserve’s latest
Policy Framework update. The largest change included making the two percent
inflation target an average objective, meaning that the Fed will now be
comfortable allowing inflation to run above the threshold for a longer period
of time and will thus be unlikely to raise interest rates to head off inflation.
The impact on longer-run rates, like the mortgage rate, will depend in part on
the Fed’s future management of inflation expectations.
Fannie Mae says risks to its forecast
remain elevated. COVID-19 cases in the U.S. continue to trend downward, although
the pattern in Europe suggest they could spike here again as well, and development
and distribution of a vaccine will probably determine the path of consumer
behavior. Uncertainty surrounding fiscal and other policies remains high as the
Further downside risks in the coming
quarters include a slowdown in global growth and consumer retrenchment in the
face of diminished unemployment benefits and the expiration of the Paycheck Protection
Program (PPP) loan program. On the other hand, the pace of consumer spending in
July remained historically modest compared to income levels. The personal
savings rate stood at 17.8 percent. Even with declining unemployment benefits
in August, it is likely that the savings rate will continue to be well above
the recent pre-coronavirus range of 6 to 9 percent. Combined with extremely
supportive monetary policy and continued pent-up demand, significant upside
risk is also present. Many households have the means to further drive a
consumption demand recovery if they are willing to do so.