Fannie Mae Downgrades Outlook. Housing Stuck in a Rut

At the second anniversary of the currentrneconomic expansion, housing remains stuck in a rut according to Fannie Mae’srnEconomic Outlook for June which notes that most housing indicators started thernsecond quarter with little momentum. rnHousing starts and builder’s confidence are still at depressed levelsrnand the sluggish construction activity reflected in both measures is one of thernreasons that the current economic recovery is less robust than previous onesrnhave been.  </p

Total construction spending improved inrnApril but it was driven by home improvements rather than single or multifamilyrnconstruction, both of which declined below the first quarter’s average.  Single-family construction spending fell forrnthe third consecutive month to reach the lowest level since June 2009.  </p

The report says that market conditionsrncontinue to favor multifamily and rental housing with demand outpacing supplyrnin some markets.  Consequently, rents arernbeginning to rise.  The strongrnmultifamily figures in the first quarter had already moved Fannie Mae to revisernhigher its multi-family starts projections for the year.  Total housing starts are now expected tornincrease 3.5 percent solely because of the multi-family sector.  Single-family starts will fall “modestly” inrn2011 compared to 2010.  </p

The supply of new homes hit a record lowrnin April while sales of new homes have increased twice since they hit an allrntime low in February.  At present therninventory of new homes stands at 6.5 months, nearing the long-term average ofrnabout six months.  However, the good newsrndoes not carry over to existing homes where few of the indicators arernpositive.  The National Association ofrnRealtors® (NAR) is blaming the sluggish market on what is calls unnecessarilyrntight credit and to low appraisals.  NARrnreported that one-quarter of its members claimed in a survey that they had torncancel contracts or renegotiate them at a lower price because of the appraised values.rn</p

That same NAR survey showed thatrndistressed and cash sales continue to account for a big but declining part ofrnthe market.  Distressed sales made up 37rnpercent of all sales in April, down from 40 percent in March while 31 percentrnof sales were all-cash compared to a record 35 percent in March.   Thernreport states that a continued decline of distressed home sales as a percentagernof the market would reduce the discount component and might give a lift to homernprices in the second quarter.</p

The discounts serve to depress appraisedrnvalues, leading to the canceled or renegotiated contracts referencedrnabove.  Homebuyers have also becomernaccustomed to watching prices fall and continue to delay action on purchasingrnnon-distressed homes.  </p

There isrnsome good news about mortgage performance. rnThe Mortgage Bankers Association reported that short-term mortgagerndelinquencies were near pre-recession levels. rnSerious delinquencies (90+ days) have dropped for five consecutivernquarters and are at their lowest levels since the beginning of 2009 andrnforeclosure starts are at the lowest point since the end of 2008.  The report states that these figures alongrnwith the drop in the percentage of loans in the foreclosure process from thernrecord high of the previous quarter indicate that the shadow supply of housingrnmay have peaked, although remaining at very elevated levels.   “It will likelyrntake years for the excess supply and the shadow supply of housing to bernabsorbed, even with a meaningful improvement in the labor market and householdrnformation, which has been elusive so far.” </p

Thernelevated inventories continue to hold home prices down.  “However, most third-party price indicesrnadjusted for distressed sales seem to indicate that troubled loans being putrnthrough foreclosure are getting seasonally adjusted (foreclosure is not arnseasonal activity), and also are likely causing an over statement of pricerndeclines for “arms length” transactions.” </p

On the broader economy Fannie Mae believes the likelihood that “the economy will slip into another downturn within a year is still quite low, but has risen slightly.” Still Fannie Mae did downgrade their economic growth outlook for 2011 from +2.9 percent to +2.5 percent in the previous forecast, which is more than a full percentage point lower than their forecast at the start of this year.  Several reasons for the downgrade were cited including continued European sovereign debt problems, a marked slowdown in growth in China as it fights rising inflation, the trade-related effects of reduction in Chinese economic activity , and dampening effects surrounding U.S. monetary and fiscal policy.</p

Fannie Mae’s economists conclude thatrnthe near-term outlook for home sales appears gloomy with both mortgagernapplications down in May and again in June and pending home sales dropping 12rnpercent in April.  </p

“Ultimately,rnemployment remains the key to the outlook for the economy and the housingrnmarket. If the tentative labor market recovery falters amid signs of a slowdownrnin consumer demand, it could jeopardize the projected moderate rebound in homernsales later this year. Continued deterioration in home prices, tight lendingrnstandards, and households’ desire to reduce their debt loads much further arernamong the main risks to the housing market and the overall economy.”

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