Housing Recovery Intact but Moderating Fannie Mae says

Fannie Mae’s Economic and StrategicrnResearch Group calls the temporary government shutdown and debt ceilingrnnegotiations in October a blow to consumers who “were cautious in theirrnspending amid continued eroding confidence. rnHousing indicators slowed further, and housing expectations turnedrnbearish despite declining mortgage rates.” rnBusinesses, however, seemed to have shrugged it off, showing the strongestrnpayroll gains since February which was part of the reason behind the FederalrnReserve advancing its schedule for tapering the purchasing program.  </p

The Group predicts the events in Octoberrnwill foreshadow likely continued market volatility during the next fewrnmonths.  Economic growth will be hamperedrnby several unresolved fiscal and monetary policy decisions which will weigh onrnconsumer spending such as the appointment of a new Federal Reserve chair inrnJanuary and another round of budget and debt ceiling debates.  Still the group expects modest growth ofrnapproximately 2.0 percent for the remainder of the year followed by a pick-uprnto 2.5 percent for 2014 once the fiscal drags wane and as labor marketrnconditions improve further.</p

“The November economic and housing forecast reflects many of the themes wernsaw last month, specifically regarding the effect of the policy decisionrnprocess on consumer attitudes,” said Fannie Mae Chief Economist Doug Duncan.rn”Monthly data showed weakening momentum in real consumer spending and suggest arnreluctance among consumers to take on more debt. Notably, third quarter datarnshow that consumption grew at 1.5 percent, which is significantly lower thanrnthe average annual increase of 3.4 percent between the end of World War II andrnthe year 2000. The modest consumer spending levels in recent months arernconsistent with the bearish trend in consumer confidence, which droppedrnsignificantly in the fall amid the fiscal standoff. Since many remaining policyrndecisions will spill over into the beginning of next year, it seems likely thatrnboth consumers and businesses will continue to pull back in the interim,rnlending to increased volatility in the markets.”</p

The Group calls the housing recovery “intact” but says it isrnmoderating.  During the third quarterrnreal residential investment contributed 0.4 percentage point to GDP for thernsecond consecutive quarter.  Much of thernhousing data which goes into the report has been delayed by the governmentrnshutdown but absent September data on housing starts, permits, and new homernsales, so far this year single-family housing starts have been disappointingrneven though permits have risen.</p

Existing home sales decreased in September and the sharp decline in pendingrnsales indicates that this trend will continue in coming months.  Builder confidence also edged down for thernsecond month in a row and the October National Housing Survey showed arnworsening housing market sentiment with home price growth expectationsrnmoderating and the biggest ever one-month drop in the numbers of respondentsrnwho say it is a good time to buy a house.  Multi-family starts have pulled back from thernhighs witnessed in the spring.</p

Home price gains also began to moderate, in part a seasonal phenomenon, butrnyear-over-year gains remain strong.  Therneconomists say they expect that the historically tight inventories willrncontinue to support more price gains. rnThe decline in shadow inventories also bodes well for prices.  Because of the rapid price appreciation inrnthe first half of the year the decline in properties with negative equityrnaccelerated, falling to 14.5 percent or 7.1 million borrowers in the secondrnquarter compared to 19.7 percent or 9.6 million borrowers in the first quarterrnaccording to CoreLogic.  Serious delinquenciesrnalso declined from a 90+ day rate of 9.70 percent at the peak in 2009 to 5.65rnpercent last quarter.  Both of thesernfactors mean fewer homes are likely to fall into foreclosure.</p

There also appears to be an easing of credit conditions.  The Federal Reserve’s Senior Loan OfficernOpinion Survey found for the fifth quarter that more banks reported an easingrnof credit standards for prime mortgage borrowers.  However demand has also weakened with 90rnpercent of survey respondents saying refinancing demand had substantiallyrndeclined since spring while a smaller number said the same about purchasernmortgage demand.</p

The drop reported tornthe Fed is consistent with results from the Mortgage Bankers Association WeeklyrnSurvey of Mortgage Applications. Refinance applications declined sharplyrnbetween May and early September before rebounding modestly through mid-October.rnHowever, the latest survey during the first week of November showed thatrnrefinance applications fell for the second time in three weeks, while purchasernapplications dropped for the fourth time in six weeks to their lowest levelrnthis year. </p

Long term interest ratesrnmoved up in response to the strong October jobs report with 10-year Treasuriesrnjumping 15 basis points to 2.75 percent. rnMortgage rates will likely rise somewhat in the near term then as therneconomy picks up should reach about 4.8 percent by the end of 2014 </p

Because ofrnwhat is calls the lackluster performance of single-family housing starts FanniernMae has lowered its projections for the remainder of 2013 and for the next twornyears, but maintained existing estimates for existing home sales and homernprices.  For 2013 they expect totalrnmortgage originations to decline about 15 percent to $1.83 trillion andrnrefinances to drop to around 63 percent compared to 73 percent in 2012.

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