The reopening of the economy in
several states from the COVID-19 shutdowns has moved Fannie Mae’s Economic and Strategic
Research (ESR) Group to raise its estimate for the 2020 full year GDP from the 5.4
percent decline it predicted in June to a 4.2 percent downturn. The economists
say this improvement is almost entirely due to a stronger pace of recovery than
they had anticipated. They caution that the current surge of cases in many
areas will drag on growth in the future, however, they expect any future
shutdowns and behavioral changes will be less severe than in the first round. Furthermore,
given that consumer spending is still down, future behavioral responses will
likely translate into only a drag on growth rather than a sharp decline, as
occurred in the early spring.

They also revised their Q2 GDP forecast
from a 37.0 percent annualized decline to 34.8 percent and raised their Q3
estimate by 7.9 percentage points to 27.4 percent annualized.

The risks to their forecast are balanced
between upside and downside risks and revolve around the pandemic. The downside
is the current resurgence in cases which could lead to regional shutdowns and
self-imposed quarantines by consumers and businesses. To the upside, if the current
wave doesn’t translate into severe cases, then consumer spending made be more
robust than currently expected. There is also uncertainty about the extension of
unemployment benefits and the passage of additional stimulus packages.

The ESR group calls the housing rebound
unexpectedly strong and early date indicates the improvement will continue in
June and July. May’s existing home sales reflected contract signings in March
and April and were down 9.7 percent month-over-month. Fannie Mae expects that
to be the near-term trough. Pending sales jumped 44.3 percent in May presaging
a strong sales number for June and early July. Purchase mortgages also
continued to surge in June, up 16.7 percent year-over-year.

The economists said they had
expected purchase activity to rebound in May and June but given the magnitude
they have revised their existing home sales forecast for the second quarter from
4.1 million annualized units to 4.3 million and boosted the Q3 estimate from
4.9 million units to 5.4 million. Sales should wane later in the summer as
pent-up demand is satisfied and inventories continue to be constrained. Full
year existing sales will be down about 7.5 percent compared to 2019 then will
grow 4.0 percent in 2021 as the economy continues to recover.

 

 

New home sales held up better in the
early spring than existing sales. At the low point in April new home sales were
down 15.6 percent on an annual basis while existing homes suffered a 24.8
percent decline. Builders offered discounting in March and April to move
inventory and had fewer concerns about the properties being shown to buyers
than did homeowners.

This stronger pace of new home sales
in recent months has outpaced construction. Single-family starts were flat in
May and the ratio of new home sales to starts was at the highest level since
2009. Sales cannot continue at recent levels unless construction picks up,
which Fannie Mae expects will happen in coming months. However, it will take
some time before inventories are rebalanced. Both labor shortages and tighter
credit for construction and development loans may also limit the pace of new
construction.

 

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The strength of sales has led Fannie
Mae to revise its forecast for home price gains. It previously predicted annual
growth for the year of 0.4 percent but are now expecting an increase of 4.4
percent. However, strong price appreciation in the short run is expected to be
partially offset later, as house price appreciation slows meaningfully moving
into 2021, consistent with continued expected elevated unemployment rates over
this period.

The ESR group points to a possible
risk specific to its housing forecast
due to uncertainty in assessing future
homebuyer behavior. They current assume that recent purchase activity strength
is largely driven by low mortgage rates and a reshuffling of sales due to the
earlier shutdowns. However, it is possible that a major consumer preference
change is underway, which could lead to a heightened level of home sales going
forward. As remote working arrangements become more common, commuting distance
may become less relevant to homebuyers, which could lead to a significant
movement of households out of high-cost metros and central business districts.
More generally, if there is a broad reassessment of desired housing features
and amenities, home sales may remain elevated for quite some time relative to
what macroeconomic conditions and mortgage rates might suggest. In addition,
new single-family home construction spending, as well as remodeling
expenditures, would likely be higher than their forecast, while multifamily
housing could experience weakened demand. Home price growth may also vary
greatly across local geographic levels and housing types, as the readjustment
process occurs.

The economists also revised their
purchase mortgage origination forecast consistent with the upgrades to home
sales and house price predictions. They now expect purchase volumes to total
$1.26 trillion in 2020, about $40 billion higher than last month’s forecast,
though this is still significantly lower than 2019 volumes. Purchase volumes will
then grow by around 1.7 percent in 2021, as the broader economy continues to
improve.

The forecast for refinance
originations was also revised upward by 5.5 percent to nearly $1.9 trillion for
2020 based on stronger-than-expected acquisition, securitization, and
application activity. The forecast for 2021 was left unchanged. According to
Freddie Mac, the 30-year fixed rate fell to 3.03 percent in the second week of
July, a new all-time low. At that rate Fannie Mae estimates that nearly 60
percent of all outstanding loan balances have at least a half-percentage point
incentive to refinance.

By Jann Swanson , dated 2020-07-14 15:40:51

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Courtesy of Mortgage News Daily

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