Fannie Mae Downgrades Housing Outlook. Again

Fannie Mae’s  Economic and Mortgage Market Analysis forrnJuly describes second quarter economic data received so far as “discouraging,” andrnforecasts growth will likely end up at about the same anemic pace as in thernfirst quarter, an annualized rate of 1.9 percent.  While the main culprits responsible for the restrainedrngrowth are higher gasoline prices and the supply chain disruptions growing outrnof the cascading disasters following the Japan earthquake, the tepid housingrnrecovery is another reason for the modest pace of economic growth.  </p

“During the two years of the current economic expansion, residentialrninvestment has yet to make a contribution to economic growth, the Analysisrnstates.”  This is unlike other recessionsrnwhen typically by this point in the recovery housing has added significantly torngrowth.</p

The current state of the housing market remainsrndownbeat.  Sales of existing homes hitrnthe lowest point in seven months in May and new home sales dipped again afterrntwo straight months of growth.  Onernbright spot mentioned in the report was a surge of 8.2 percent in pending homernsales in May.  However, as we reportedrnhere last week, the National Association of Realtors blamed cancellation of manyrnof those contracts, possibly due to financing difficulties, for the furtherrndrop in sales of existing homes in June. rnAnother positive is the share of home sales attributable to distressedrnsales which means less downwardly distorting pressure on home prices from therndistressed sale discounts.  Consequently medianrnhome prices in non-distressed have begun to rise.  Fannie Mae economists view this as a seasonalrnphenomenon, however, and project further deterioration of home prices, perhapsrnto new lows, when the summer market ends.</p

Within the new home market supply and demand conditions havernbecome more balanced with a further drop taking the inventory to a record lowrnin May.  The inventory-sales ratio (thernnumber of months to deplete the existing inventory at the current pace ofrnsales) is now at 6.2 months, matching its long-term average.  Existing homes however are still weightedrnheavily on the supply side with large numbers of delinquent mortgages creatingrna shadow inventory of houses.  Because ofrnthe widely publicized problems with foreclosure processes that emerged in thernfall, the time for working through the excess supply and the shadow inventoryrnhas increased and will further delay the recovery of the housing market.</p

Fannie Mae has downgraded its housing outlook for thernremainder of the year.   Single family housing starts are expected torntotal 440,000 this year, a 7 percent decline from the 471,000 starts inrn2010.  This is a downward revision ofrn20,000 starts since last month’s analysis.  rnProjections for starts in 2012 have also been downgraded from 671,000 torn646,000 since the June Analysis.The company’srnhousing survey for June showed a marked deterioration in consumers’rnexpectations of home prices over the next year and is just another piece ofrnsurvey data showing that consumers remain reluctant to take on large debt.</p

Home prices are expected to decline further this year andrnnext.  The median price in 2010 for a newrnhome was $221,800.  This year it isrnexpected to be $216,900 and in 2012 $214,100. rnExisting homes are expected to sell for a median price of $165,600 thisrnyear and $163,700 next, compared to $173,000 in 2010.</p

Mortgage interest rates will move up just slightly over thernyear to finish at 4.7 percent and rise again in 2012 to an average of 5rnpercent.  Total mortgage originations inrn2011 will decline to $1.07 trillion from $1.51 trillion in 2010 and declinernfurther still next year to $999 billion. rnSingle family mortgage dept will fall an additional 2.6 percent fromrn$10.54 trillion to $10.26 trillion. </p

The report also points to the vulnerability of the bankingrnsector to mortgage-related risk. rnRecently the Federal Reserve began to auction off low-qualityrnmortgage-related assets associated with its take-over of AIG.  The auctions did not go well and severelyrndisrupted the private label market and caused market participants to mark downrnasset values on banks’ balance sheets. rnThe program has been suspended.</p

Overall, Fannie Mae’s economists do not expect a “quickrnsnap-back” in activity.  Among thernpositives mentioned in the report was a rebound in auto production followingrnthe aforementioned supply chain disruptions and strong durable goods report andrncapital goods orders.  However, there wasrna surprisingly week report on consumer spending and labor market data includingrnemployment reports and earnings reports were what Fannie Mae termed “a bust.”</p

READ MORE: Fannie Mae Downgrades Outlook. Housing Stuck in a Rut

All Content Copyright © 2003 – 2009 Brown House Media, Inc. All Rights Reserved.nReproduction in any form without permission of MortgageNewsDaily.com is prohibited.