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Fannie Mae expects housing to help stabilize U.S. economy


The U.S. economy will continue to look to a healthy residential real estate market to help offset ongoing weakness in business investment, according to the newest commentary from Fannie Mae’s Economic and Strategic Research (ESR) Group.

Display of investment quotes with city scene reflect on glassCoupled with consumer spending — which remains the primary driver of U.S. gross domestic product (GDP) amidst the persistent manufacturing slump — the housing sector will be a near-term source of strength, ESR predicted in its October economic and housing outlook. Annualized residential fixed investment in third-quarter 2019 is now forecast at 4.2%, 3.3 percentage points higher than the previous month. If actualized, it would represent the first time residential fixed investment has been positive since 2017, turning the corner after being "a drag on the economy for nearly two years," the ESR Group wrote.

“The housing sector appears poised to offer meaningful near-term contributions to growth,” said Doug Duncan, Fannie Mae's chief economist.

Recent home sales, housing starts and construction spending have had strong increases — stronger than expected, in some cases — leading Fannie to predict that the sector’s momentum will continue into the fourth quarter of this year.

The ESR Group noted a decline in home-purchase applications in August and, combined with July’s tepid pending-sales index, a pullback in sales in September is expected once the final numbers are in. Still, Fannie economists see a likely sales rebound entering the final quarter of 2019, thanks to bounce backs in purchase applications in September and pending sales in August. Any October improvement, however, will be tempered by the enduring shortage in supply, meaning existing sales are likely near their peak pace for the time being.

Given all that, the ESR Group maintained its forecast of 2.2% GDP growth in 2019, even as it downgraded its growth estimate for the third quarter in response to the month-long General Motors strike. Negotiators from GM and the United Auto Workers union reached a tentative deal to end that standoff on Wednesday, further underscoring that any slowdown is likely temporary. Fannie also upwardly revised its 2020 GDP projection to 1.7%, with the healthy labor market and household wealth gains expected to drive more consumer spending.

Additionally, Fannie Mae updated its prediction for two Federal Reserve rate cuts in the next few months — one this month and another in January 2020.

“Unfortunately, expectations for a stronger housing market through the early part of next year are unlikely to offer prospective homebuyers much respite from the longstanding affordability issue,” Duncan said. “Home prices appear likely to maintain a positive growth trajectory due in part to persistently low mortgage rates and evidence of declining inventory.

“On the flip side, the supply imbalance should be supportive of new-home construction, which we believe will lead to an uptick in single-family housing starts through next year.”


 

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