A continued recovery in housing and rising home prices should provide a cushion to economic growth this year, offsetting the hampering effects of tax increases and government spending cuts, according to a monthly economic outlook released today by economists at Fannie Mae.
A shortage of homes for sale lead to home price appreciation at the national scale in 2012 and continuing into 2013. Fannie Mae anticipates existing home prices will rise 5.1 percent this year, to a median $186,000, and 3.8 percent in 2014, to $193,000. Prices for new homes are expected to increase 4.1 percent in 2013, to a median $254,00, and 3.5 percent in 2014, to $263,000.
But higher-than-expected price jumps and continued tight inventory will likely restrain existing-home sales this year and next year, leading Fannie Mae economists to downwardly revise their sales expectations this month.
They project that existing-home sales, which were up 9.4 percent last year, will grow by an additional 6.9 percent this year, to 4.98 million homes, compared to last month’s projection of a 10.5 percent jump this year, to 5.15 million homes. They estimated existing-home sales will rise 5.5 percent in 2014, to 5.26 million homes, compared to last month’s prediction of a 6.2 percent rise.
Nonetheless, sales of new single-family homes are expected to post stronger growth than previously predicted in 2013, 18 percent, though slightly lower growth than anticipated in 2014, 35.8 percent.
Increasing home prices brought more than 1.7 million properties above water in 2012 and will continue to do so this year, Fannie Mae said, freeing many borrowers to put their homes on the market and potentially easing the inventory shortage, albeit gradually.
Citing a quarterly home price expectations survey from Zillow, the mortgage giant said home prices will rise an estimated 17.5 percent cumulatively between 2013 and 2016, helping all but the most severely underwater mortgages — those with loan-to-value ratios of 120 percent or higher — regain positive equity.
Fannie Mae economists added that 2016 was also the year they expected housing-related activity, including homebuilding and residential construction employment, to return to “normal.”
Home price gains should also encourage banks to make more mortgage loans by boosting their confidence that the properties they are lending against will hold their value, Fannie Mae said. Tightened mortgage credit has been one of the final barriers to a return to a normal housing market, Fannie Mae added.
The mortgage giant expects low mortgage rates to continue to support the housing market with the average rate for a 30-year fixed-rate mortgage rising from 3.5 percent in the first quarter to 4 percent in the last three months of this year to 4.4 percent in fourth-quarter 2014.
Fannie Mae economists downwardly revised their expectations for purchase loan originations this year slightly. Purchase loans are projected to rise by 15.7 percent this year, to $613 billion, and by 17.3 percent in 2014, to $719 billion. But expected double-digit declines in refinancings are expected to push total mortgage originations down by 15.4 percent this year, to $1.63 trillion, and by another 30.9 percent in 2014, to $1.13 trillion.
In general, Fannie Mae expects housing to provide a headwind to the U.S. economy, as it has for the past few quarters.
“While overall economic reports signal some moderation in economic activity heading into the current quarter, the continued housing recovery and rising home prices will provide a cushion to growth this year and present the most likely source of upside to our forecast,” the report said.
The European debt crisis remains a concern for the overall economy as do the tax increases and government spending cuts known as “sequestration” that Fannie Mae economists had previously assumed would not take full effect. They now say those assumptions proved “too conservative” and have included more front-loaded cuts in their current forecast. Last month they said that failure to avert full sequestration could amount to a 0.5 percent drag on economic growth for the year.
Fannie Mae economists expect unemployment will average 7.7 percent this year and 7.4 percent rate in 2014, unchanged from last month. After another upward revision, real gross domestic product growth came in at 1.7 percent for 2012. First-quarter economic growth came in stronger than expected, at 3.2 percent — a pace Fannie Mae said was “likely unsustainable,” but that helped push up economists’ predictions of growth this year to 2.3 percent, followed by 2.7 percent growth in 2014.
“While fiscal restraint and the euro-zone crisis still pose downside risks to our forecast, the broadening housing recovery could very well be more robust than we anticipate, thus our modest increase in forecast growth,” the report said.