Fannie Mae: Fed Actions Require Fiscal Stimulus to be Effective

Freddie Mac’s September 2011 Economic Outlook is focused on the recent Federal Reserve Bank announcement of its MaturityrnExtension Program (aka Operation Twist) and its potential impact on the economyrngenerally and real estate in particular. rnOn September 21, the Fed said that over the next 9 months it would berndivesting itself of $400 billion securities with remaining maturities of threernyears or less, and investing the proceeds in securities with six to 30 yearrnmaturities.  The Fed is making the movernin the expectation that it will exert further downward pressure on long-termrnyields and promote additional loan demand, thus stimulating the economy overrntime.</p

The Economic Outlook said that interest rates, perhaps inrnanticipation of another Fed move following its  earlier interventions with qualitative easingrnwith QE ($1.7 trillion) and QE2 ($600 billion) had moved lower since thernbeginning of September and  long-termrnmortgages are now at “extraordinary lows” for both single-family and apartmentrnand commercial mortgages.</p

Frank E. Nothaft, Chief Economist for Freddie Mac, saidrnthat, by itself monetary policy may gradually promote economic growth in the comingrnyear, “but coupling it with fiscal stimulus could accelerate growth in 2012 ifrnthe fiscal initiative operates in tandem.” rnThe Administration’s ‘American Jobs Act,’ he said is one such example ofrna fiscal policy response.  The proposedrncombination of temporary tax cuts or extensions of existing ones along withrn$202 billion in spending on a variety of programs should give a near-term boostrnto consumer spending and business investment, and with the budgetary offsetsrnthe Administration expects in later years, should not add to the federalrndeficit over time.</p

Nothaft quotes data from Macroeconomic Advisors (MA) which estimatesrnthat the Jobs Actg  would result inrneconomic growth next year more than a point faster with about 1.3 millionrnadditional workers employed by the end of 2012. rnThat job growth would push unemployment down about 0.3 to 0.4 percentagernpoints from where it would be without any stimulus but still leave it above 8.0rnpercent at the end of that year.  MA,rnMoody’s Analytics and the Conference Board all expect the effects of the billrnto dissipate as they project into 2013.  </p

A better economy and more substantial job creation wouldrnalso lift consumer and business-owner outlooks. rnFinancial worries among consumers are likely holding back home sales,rnNothaft said, but boosting job and income growth will support consumerrnconfidence and also stimulate household formation.  With monetary policy expected to keeprninterest rates low for a while affordability will remain high for homebuyers.  In the meantime, many have chosen to rent andrnthis is reflected in an improved rental market which is expected to seerncontinued strong demand over the next year.</p

Freddie Mac has changed many of its projections for thernremainder of 2011 and into 2012 and few of these changes are positive.  The table below shows the changes for thernfourth quarter of this year and the fourth quarter of 2012 as they werernprojected in August and then in September.</p<table border="1" cellpadding="0" cellspacing="0"<tbody<tr<td valign="top" width="235"</td<td colspan="2" valign="top" width="210"

Fourth Quarter 2011</p</td<td colspan="2" valign="top" width="193"

Fourth quarter 2012</p</td</tr<tr<td valign="top" width="235"</td<td valign="top" width="108"

Aug 2011</p</td<td valign="top" width="102"

Sept 2011</p</td<td valign="top" width="102"

Aug 2011</p</td<td valign="top" width="91"

Sept 2011</p</td</tr<tr<td valign="top" width="235"

Real GDP (%)</p</td<td valign="top" width="108"

2.5</p</td<td valign="top" width="102"

2.0</p</td<td valign="top" width="102"

3.5</p</td<td valign="top" width="91"

3.3</p</td</tr<tr<td valign="top" width="235"

Unemployment Rate (%)</p</td<td valign="top" width="108"

9.0</p</td<td valign="top" width="102"

9.1</p</td<td valign="top" width="102"

8.5</p</td<td valign="top" width="91"

8.7</p</td</tr<tr<td valign="top" width="235"

30 yr FRM</p</td<td valign="top" width="108"

4.6</p</td<td valign="top" width="102"

4.1</p</td<td valign="top" width="102"

5.4</p</td<td valign="top" width="91"

4.9</p</td</tr<tr<td valign="top" width="235"

Housing Starts (millions)</p</td<td valign="top" width="108"

.60</p</td<td valign="top" width="102"

0.60</p</td<td valign="top" width="102"

.95</p</td<td valign="top" width="91"

0.83</p</td</tr<tr<td valign="top" width="235"

Total Home Sales (millions)</p</td<td valign="top" width="108"

4.60</p</td<td valign="top" width="102"

4.60</p</td<td valign="top" width="102"

5.30</p</td<td valign="top" width="91"

5.40</p</td</tr<tr<td valign="top" width="235"

FMHPI House Price Appreciation (%)</p</td<td valign="top" width="108"

-6.0</p</td<td valign="top" width="102"

1.8</p</td<td valign="top" width="102"

1.5</p</td<td valign="top" width="91"

0</p</td</tr<tr<td valign="top" width="235"

1-4 Family Mort. Originations </p</td<td valign="top" width="108"

 </p</td<td valign="top" width="102"

 </p</td<td valign="top" width="102"

 </p</td<td valign="top" width="91"

 </p</td</tr<tr<td valign="top" width="235"

      Conventional (billions)</p</td<td valign="top" width="108"

$163</p</td<td valign="top" width="102"

$154</p</td<td valign="top" width="102"

$140</p</td<td valign="top" width="91"

$140</p</td</tr<tr<td valign="top" width="235"

      FHA/VA (billions)</p</td<td valign="top" width="108"

$67</p</td<td valign="top" width="102"

$67</p</td<td valign="top" width="102"

$47</p</td<td valign="top" width="91"

$50</p</td</tr<tr<td valign="top" width="235"

Refinancing Share – Orig. (%)</p</td<td valign="top" width="108"

50</p</td<td valign="top" width="102"

65</p</td<td valign="top" width="102"

35</p</td<td valign="top" width="91"

40</p</td</tr<tr<td valign="top" width="235"

Residential Mortgage Debt (% chg)</p</td<td valign="top" width="108"

-2.0</p</td<td valign="top" width="102"

-2.0</p</td<td valign="top" width="102"

4.0</p</td<td valign="top" width="91"

1.5</p</td</tr</tbody

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