Rising Rates and End of QE in 2014 – Fannie Mae

Some of the gist of Fannie Mae’s October EconomicrnForecast, released Thursday but written late last week, was made obsolete whenrnthe government shutdown ended last evening, but the company’s economists did correctlyrnpeg the length of the episode and the ultimate outcome,   Given that they did project a shutdown of twornto three weeks and an eventual raising of the debt ceiling, their economic andrnhousing market projections based on those guesses are still valid.  Doug Duncan, Orawin T. Velz, and BrianrnHughes-Cromwick lowered their estimate of economic growth in the fourth quarterrnfrom 2.5 to 2.0 percent, bringing full year growth to 1.9 percent compared torn2.0 percent in their last forecast. </p

The decisionrnmade by the Federal Reserve in September to maintain the pace of assetrnpurchases has brought long-term interest rates back down and has cushioned somernof the adverse impact of the shutdown and debt ceiling debates however it willrnnot be enough to offset  some near termrnweakening of momentum and fiscal headwinds. rnFannie Mae’s economists expect the Fed to start tapering next year andrnend its asset purchase program in the second half of 2014.  They expect no funds rate hikes until Q3 2015rnwhen they expect unemployment to decline near the magic Fed number of 6.5rnpercent.   </p

Turning tornhousing, the economists expect mortgage rates to rise gradually through thernyear, averaging 4.4 percent in the fourth quarter and 5.0 percent a year fromrnnow, a figure 20 to 30 basis points lower than their projections last month.</p

Housing indicators have been generallyrnpositive.  Existing home sales, possiblyrnreflecting a rush to buy in the face of rising interest rates, rose to their highestrnlevel in six years.  Pending home sales,rnhowever, declined in August for the third month, suggesting a pullback in salesrnin the fourth quarter.  So far in 2013rnhome sales are nearly 12 percent above those in 2012 so even if they declinernsharply in the fourth quarter they will still probably finish the year up 10rnpercent, slightly stronger than the September forecast.</p

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Home starts were also up in August fromrnseveral disappointing prior months and single family permits rose for thernfourth time in five months.  Multifamilyrnstarts and permits were both down.  </p

The authors say they do not expect thernrecent easing of mortgage rates to revive the refinancing boom but it shouldrnprovide another window of opportunity for homeowners.  Some appear to be taking advantage of itrnaccording to Mortgage Bankers Association numbers.  Purchasing activity however has seen limitedrnimprovement.  </p

The three say if the shutdown lasts lessrnthan a month, which it did, the impact on the mortgage market should bernlimited.  The FHA and VA continued tornprocess new loans despite reduced staff as did lenders with delegated FHA authority.  The shutdown did affect small FHA lenders asrnwell as issuances through Ginnie Mae.</p

As the result of an annual benchmark tornrecently released Home Mortgage Disclosure Act (HMDA) data for 2012 Fannie Maernhas increased its estimate of total mortgage originations in 2012 by $127rnbillion to $1.25 trillion which, along with the lowering estimate of interestrnrates, led to higher trajectories for originations this year and next.  For all of 2013 they expect total mortgagernoriginations to fall about 15 percent to $1.83 trillion and refinancing to droprn10 percentage points from an estimated 72 percent in 2012.  </p

With expected rising mortgage rates throughrn2014, refinancing originations arernprojected to decline further, outweighing the expectedrnincrease in purchase mortgage originations, bringing totalrnmortgage originations down to $1.36 trillion in 2014. Total single-family mortgage debt outstanding fellrn1.8 percent annualized in the second quarter againstrntheir expectation of an increase, and leading to a downgrade of their forecastrnto a small decline in 2013, the sixth consecutive annual drop. </p

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