At the midway point of the current (3rd) quarter Fannie Mae is looking for a huge improvement in the gross domestic product (GDP). The company’s Economic & Strategic Research (ESR) Group is forecasting an increase of 27.2 percent for the quarter and has revised its projected decline for the entire year from 4.2 percent to 3.1 percent.
The rosy outlook is based on a savings rate of 19 percent in June. “extremely accommodative fiscal and monetary policy to date” and data on mobility and credit card expenditures in July. If actualized it would represent a quick turnaround from the 32.9 percent decline in Q2, the steepest since at least 1947 when the quarterly GDP data series began.
The second quarter would have been worse if a partial recovery had not started in its second half. Real personal consumption expenditures (PCE) rose 5.2 percent in June, following an 8.3 percent rebound in May. More recently, early indicators suggest that the pace of growth slowed in July, as coronavirus cases spiked. However, the earlier improvement means that economic activity began the third quarter at a pace much higher than the second quarter average. This should translate into a historically strong Q3 growth rate even with only minimal growth over the rest of the summer.
There are still substantial risks to the forecast. The early third quarter flare-up of the virus in the Sun Belt did not derail economic growth as had the initial outbreak and the economists take this as an indication that similar future waves of cases are likely to slow growth rather than cause a contraction. Still, the potential for more aggressive shutdowns and social distancing measures remains a downside risk.
They also assume that behavioral changes due to the pandemic will continue into next year and that a large segment of economic activity such as hospitality and travel will recover slowly. This, coupled with near full recovery in those sectors less affected by social distances, will mean lower growth in 2021.
Fannie Mae’s assumptions are also predicated on passage of a new stimulus bill in the range of $1.0 to $1.5 trillion and including some level of elevated unemployment benefits and an additional round of checks to households. If not, short-term growth in Q4 and early 2021 would likely be lower than forecast, possibly leaving more room for growth in 2021. The November election adds to the uncertainty around the forecast.
Residential fixed investment declined at a 38.7 percent annualized rate in the second quarter, but since hitting a low in April, housing activity has been remarkably strong. Monthly housing data for June came in near expectations, rising 20.7 percent to 4.72 million annualized units, and pending sales, which predate closings by 30 to 45 days, rose 16.6 percent, eclipsing February’s peak. This suggests existing sales in July could approach a level not seen since 2006. The ESR Group has revised its forecast for existing home sales for 2020 from a 7.5 percent to a 4.5 percent decline and for new home sales to rise 0.9 percent rather than the earlier expectation for a 2.4 percent decline.
Even with the pent-up demand and low interest rates, the elevated pace of sales is not sustainable given the tight inventories. Months’ of supply of existing homes for sale were likely near or below record lows in July and the pace of new listings has grown much more slowly than recent purchase demand. On the other hand, recent mortgage application data from the Mortgage Bankers Association suggests that while sales are slowing somewhat, the pace has held up considerably better than previously anticipated.
New home sales jumped 13.8 percent in June to the highest level since 2007. Single-family housing starts also rose, increasing 17.2 percent, but remain below pre-pandemic levels and the ratio of starts to sales reflects depletion of inventories as builders heavily discounted product at the height of the shutdowns. On their second quarter earnings calls many publicly traded homebuilders said their spec inventory had diminished and building needed to be accelerated. The lack of existing homes for sale appears to be bolstering demand for new construction.
Fannie Mae points to another possible dynamic for new construction. The company’s internal data show a substantial increase in many metro areas in purchase mortgage applications for homes in lower density areas by those currently living in urban cores. Zip code-level house price measures from Zillow also show changes in price appreciation have been comparatively weak in many urban areas relative to the outer suburbs. It is too soon to tell whether this represents a permanent shift to the suburbs as remote working becomes more prominent and concern over social unrest impacts preference, or if this is a temporary phenomenon, representing a portion of urban dwellers accelerating their moving plans due to social distancing and low interest rates. Regardless, for the time being, this dynamic appears to be more than anecdotal and should help to support new single-family home construction and sales in coming months with demand apparently shifting to locations with more available land.
The company has increased its forecast for new single-family starts and sales considerably. Single-family starts will increase to 904,000 annualized units in Q3 compared to the prior forecast of 815,000 an 0.7 percent decline rather than 6.1 percent. New home sales will increase to around 685,000 annualized units in Q3 and to 689,000 for the year, up from 660,000 and 667,000, respectively.
The stronger outlook for sales along with upward revisions of historical data based on the CFPB’s release of Home Mortgage Disclosure Act (HMDA) data for 2019 led to an increase in estimated total origination volumes last year of 6.8 percent to $2.5 trillion, with purchase volumes increasing by 2.7 percent to $1.3 trillion and refinance volumes increasing 12.1 percent to $1.1 trillion.
On the purchase side, in addition to the upward revision of 2019 mortgage originations, the HMDA release implied a higher path for purchase volumes into 2020 and 2021 as well. Combined with upward revisions to the home sales forecast, purchase volumes are now expected to be $1.3 trillion in 2020, about $74 billion higher than last month’s forecast. Purchase volumes are then projected to grow about 1.8 percent in 2021 as the broader economy continues to improve.
Given the improved view on the size of the refinance originations market and the continued low mortgage rate environment, refinances should reach $2.1 trillion this year, an upward revision of 10.3 percent relative to last month’s forecast. They will probably fall to $1.1 trillion next year, but historically low mortgage rates should sustain refinance demand for the near future. According to Freddie Mac, the 30-year fixed mortgage rate fell to 2.88 percent in the first week of August, a new all-time low. At the current mortgage rate, about 65 percent of all outstanding loan balances have at least a half-percentage point incentive to refinance.