Optimism is running high
in Fannie Mae’s first Economic and Housing Outlook of the year. The company’s
Economic and Strategic Research (ESR) team says expanding vaccination efforts, the potential of greater than
previously expected fiscal stimulus, and the end of winter all “point to an
economy ready to take off once COVID-19-related effects begin to subside.”

The company says that economic growth probably flatlined in
November and December and it revised its final GDP estimate for the year down
to a negative 2.7 percent. The economy is now poised to expand, although
probably not before late spring. The ESR team has raised its expectations for 2121
from 4.5 percent growth in last month’s report to 5.3 percent and by 0.4 points
for 2022 to 3.6 percent.  

The Federal Reserve has stated it intends to let inflation
exceed its long-term target
for “some time” so Fannie may has increased its inflation
forecast for the 4th quarter of 2021 and beyond. Core personal
consumption expenditures (PCE) inflation should reach 2.4 percent annually by
the end of 2022.

The future path of the pandemic is the biggest downside risk
to the current forecast. Distribution of vaccines has been slower than
anticipated, however, the economists continue to assume that warmer weather and
widespread inoculations will allow removal of many economic behavioral
restrictions by mid-spring.

The path of interest rates is also a major forecast risk. The
10-year Treasury yield is up over 20 basis points since the first of the year
and market-based measures of inflation have trended up as well. While changes
are still modest, any meaningful rise in rates would likely dampen economic,
housing, and mortgage activity relative to the year-end baseline forecast. A
sudden, sharp jump in rates could cause an equity market sell-off and restrain
home sales and prices.

The company says the slim Democratic edge in the Senate increases
the likelihood of additional fiscal stimulus. Since it remains unclear whether
or when legislation would be passed or what might be included in it, the forecast
doesn’t incorporate any additional fiscal stimulus at this point.

Fannie Mae expects housing to remain strong this year,
however it is likely to “shift down a gear following its torrid pace during the
second half of 2020.” A near-term slowdown in home sales is likely but total home
sales are expected to be 3.8 percent higher in 2021 than in 2020 and
single-family housing starts will rise by 12.5 percent.

The 11.0 downturn in new home sales in November was at least
partially due to an unsustainable relationship between housing starts and home
sales over the past half-year. Sales had been bolstered by inventory drawdowns
and sales contracts for homes not yet started so some combination of declining
sales and accelerating starts was necessary for a sustainable balance. In
addition, prior months’ estimates were revised significantly downward, doing
away with a lot of the starts/sales gap, and putting the sales pace on
comparatively stronger footing going forward. There will be a modest near-term pullback,
largely reflecting a rebalancing of the number of early- and late-stage homes
under construction, after which single-family housing starts should exhibit
comparable strength going forward, accounting for the 12.5 percent 2021



All of this points to an existing home sale forecast slightly
above pre-pandemic trends and an even more positive outlook for single-family
construction. If correct, this could be a decline in multifamily housing demand,
especially in more expensive urban areas, holding those starts below their
pre-COVID pace.

Despite the upbeat view on construction, housing is not
expected to provide the contribution to GDP
that it did over the last two
quarters of 2020. Fannie Mae expects residential fixed investment will be down
3.8 percent from Q4 2020 to the same quarter this year. Some of this weakness will
come from the slow deceleration in multifamily starts late last year, however
the bulk of the decline will be due to heighted home improvement spending and
broker commissions in Q4 which will not be sustained this year. Home
improvement spending has historically been highly correlated with both home
sales and rising home equity (which allows owners to borrow against their
home’s value). As sales and appreciation are expected to decelerate, home
improvement spending is likely to follow suit.

The company upgraded its estimate for 2020 home price growth from 6.4 percent to 10.3 percent and doubled its forecast for this year to 4.2 percent. This, as well as upwardly revised sales expectations, led to another increased outlook for mortgage originations. Total originations in 2020 were $4.4 trillion ($125 billion higher than expected last month).while 2021 and 2022 originations are expected to decelerate to $3.9 trillion and $3.2 trillion ((up $440 billion and $378 billion from the prior forecasts), respectively.

Purchase volumes are now expected to total $1.6 trillion in 2020 and $1.8 trillion in 2021, upward revisions of $49 billion and $88 billion, respectively, from last month’s forecast. Purchase growth is expected to decelerate in 2022, growing just 1.0 percent year-over-year, as a slower sales pace represents a drag on volumes.

Refinance origination volume in 2021 is expected to increase
20 percent
over last month’s forecast to $2.2 trillion, although this will
still be lower than the record volume of $2.8 trillion in 2020. Fannie Mae says
there is still capacity for strong refinancing volume this year, especially in
the first quarter. At current interest rates, an estimated 67 percent of
outstanding mortgage balances still have at least a half-percentage point
refinance incentive. Volume is projected to decline further to $1.4 trillion in
2022, though remain elevated from an historical perspective, as interest rates
stabilize and the share of mortgages with a rate incentive to refinance begins
to wane.

Mortgage rates fell again in early January to 2.65 percent,
another record low. However, the decline in rates may be nearing an end. The
10-year Treasury yield jumped in early January, narrowing mortgage spreads. The
spread between the 30-year mortgage rate and the 10-year Treasury yield fell to
approximately 160 basis points, the lowest since mid-2019. While the spread
compression indicates falling lender margins, Fannie Mae says mortgage lenders may
be willing to absorb some of this cost before passing it on to consumers
through higher mortgage rates.    

The ESR team says it remains a question how the unusual
events of the past year will shape housing trends long-term. They speculate
that the pandemic’s lasting effects will include a modestly higher pace of home
sales than otherwise would have occurred, as well as comparatively stronger
support for new construction. They do not predict a major exodus from large
urban areas but do see the expansion of remote working as enabling increased migration
to the suburbs and less expensive metros even after the crisis passes. People rethinking
their choices and continuing to relocate to new locations could mean a modest
increase in home sales, and if those sales shift toward less expensive areas with
more buildable land or less restrictive zoning, it would bode well for new
single-family construction.

By Jann Swanson , dated 2021-01-22 13:00:35

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Courtesy of Mortgage News Daily

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