A recent spate of positive news has allowed
Fannie Mae to upgrade several pieces of its economic forecast this month. The
approval of at least one COVID-19 vaccine, new hope for additional stimulus
approval, and stronger than expected incoming data has pushed the company’s
economists to upgrade their outlook for real gross domestic product (GDP) to
negative 2.2 percent for the full year 2020, up from a negative 2.5 percent in
their November version. The change for 2021 is more substantial, from 3.3
percent to 4.5 percent. Growth in 2022 has been raised two-tenths of a point to
3.2 percent. The economists say, “We continue to believe that the conditions
for a continued, strong recovery are present once the limiting factors of
COVID-19 on consumer behavior are lifted.”
The Q4 GDP forecast has also been revised
upward, from 4.3 percent annualized to 5.4 percent, based almost entirely on activity
in October. It reflects an expectation of only slight growth in consumer
spending (PCE), which was unusually high in October, into November, then a modest
decline in December. This weakness is expected to continue into the first month
or two of 2021 prior to a rebound as spring approaches.
Growth in the next few months is
likely to be weak, and uncertainty high as the economy navigates some
obstacles. At this point, COVID-19 cases continue to rise, and hospitalization
rates and daily fatalities are hitting record highs so local governments are
increasingly implementing restrictions. Colder weather will probably put a
damper on outdoor activities such as dining which did experience some earlier
recoveries. It is also unclear how heavily holiday spending will be impacted.
Comparative weakness in labor market
measures, namely a deceleration in employment growth in November to 245,000
jobs, down from 610,000 in October, as well as a recent bump up in unemployment
claims, suggest that some softening is already underway.
Home sales continued their recent
trend of remarkable strength. Existing home sales again surprised to the
upside, rising 4.3 percent in October to 6.85 million annualized units, compared
to an expectation of a modest decline. This provoked an upgrade in the fourth
quarter existing sales expectation to an annualized 6.62 million units from
6.22 million. The outlook for 2021 also changed. Fannie Mae still forecasts a
strong pace of sales in the first quarter, a 12.1 percent gain from the first
quarter of 2020, sales will probably pull back from its October pace.
Inventories continue to be extremely tight, with the months of supply of
existing homes for sale hitting 2.5 in October, the lowest on record and down
from 2.7 months in September. Rapid home price appreciation has also eaten into
the affordability gains from lower mortgage rates, with home prices up 7.3
percent in October from a year prior according to the CoreLogic National Home
History suggests that the current
sales pace for homes is not sustainable. October’s sales were above the
normal relationship with the prior month’s pending sales index, which leads
closings by 30-45 days. When these two series have diverged in the past, there
is usually a convergence within a month or two. Further, the pending
sales index dipped back 1.1 percent in October, and the Fannie Mae Home
Purchase Sentiment Index pulled back 1.7 points in November, both of which
suggest a modest cooling of home sales in the near term.
Fannie Mae doesn’t believe the
strong homebuyer demand is due entirely to low interest rates or residual pent-up
demand from the spring lockdowns. Its mortgage application data continues to
show an elevated rate of urban dwellers purchasing homes in lower density areas
in November. Whether this is a permanent shift in homebuyer preferences or a
temporary one related to social distancing, it does appear to be further
driving elevated purchase demand and will probably continue to support sales
until at least the spring.
Low inventories of existing homes
and increased buyer demand for more suburban and exurban locations continues to
support new home construction. Single-family housing starts rose for the sixth
time in October, up 6.4 percent to 1.18 million annualized units, the highest
rate since 2007. Home sales have eclipsed their usual relationship to starts, so
there is an abnormally high share of homes sold that have not yet been started.
This probably means the current pace of new home sales is not sustainable, even
as home construction remains strong.
That construction, however, may be
reaching capacity constraints. For a decade, the seven-month rolling average of
single-family starts, (seven months being the time it takes to build the
average home) has correlated with residential construction employment. Employment,
which represents builder capacity, has increased only modestly in recent months
compared to the pace of starts which suggests starts will need to pull back to
a more sustainable level until employment catches up.
Multifamily housing starts were flat
in October, at 351,000 and Fannie Mae expects the sector to be weaker than
single-family construction for the foreseeable future. Suburban multifamily
demand is expected to hold up better, but the shift of some renters out of
large metro areas and into homeownership, combined with continued remote
working arrangements, will likely weaken demand for new projects in many areas.
The financial system appears to be
in much better shape than it was following the 2008 recession and the strong housing
sector, an element missing back then, is helping lead the recovery. The
recoveries from the prior three recessions all included a substantial period of
an increased savings rate as households tried to repair their balance sheets
after asset bubbles deflated and those savings dragged on recovery. In those
recessions without asset bubbles, saving tended to decline more quickly and recoveries
were brisker. Fannie Mae things the latter will be the dynamic this time.
Since February, households have saved
an aggregate of about $1.6 trillion more than at the pre-COVID rate. This, combined
with rising equity and home prices, has led to a substantial increase in
household net wealth. At the end of Q3 2020, net wealth was 4.4 percent higher
than in the same quarter in 2019, a stark contrast to the downturn of 15.4
percent in the Great Recession. This provides a large amount of consumer
spending power that was not present back then.
There are, of course, downside risks
to all of the forecasts. Will vaccine distribution be fast and efficient and acceptance
adequate? Might the vaccine create overconfidence and riskier behavior that
results in additional infection waves and lockdowns? It is unknown to what
extent permanent structural damage has occurred to business sectors and
geographies, and if debt defaults and bankruptcies will drag the economy down. If
growth does begin to accelerate, so might inflationary expectations, causing a significant
jump in longer-term interest rates. This could quickly dampen the housing and
other sectors of the economy that have benefited from the current low-rate
Fannie Mae has also upgraded its forecast
for mortgage originations. Its purchase mortgage predictions, it says, are in
line with the upgraded outlook for housing, as well as continued recent
strength in incoming acquisition and securitization data. Purchase volumes are
now expected to total $1.6 trillion in 2020, about $26 billion higher than last
month’s forecast. Those volumes will grow another 7 percent to nearly $1.7
trillion in 2021, an upgrade of $68 billion from the November forecast.
Refinance originations are expected
to reach $2.7 trillion this year, a $142 billion increase from last month’s
forecast and surpassing the historical peak in 2003. This momentum is expected
to continue through 2021, given the continued low-rate environment and Fannie
Mae’s estimate that nearly 70 percent of outstanding mortgage balances have at
least a half-percentage point incentive to refinance. The volume for 2021 refinances
was revised upward significantly to $1.8 trillion, although that represents a
decline from 2020’s peak.
Total originations are now projected
at $4.29 trillion this year, an upward revision of $169 billion. The 2021 forecast
has been raised by $745 billion to $3.47 trillion. For 2022 total originations
are forecast at $2.84 trillion.