FNMA belives rate increases will not trip up housing recovery

Fannie Mae: Rising mortgage rates won’t trip up recovery

Housing market growth has helped economy cope with fiscal headwinds

Teke Wiggin Staff Writer

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Jun 13, 2013

Sunny housing outlook image via Shutterstock.

The housing market continued to make up lost ground as it entered the spring-summer season, with home prices, home sales and homebuilding showing signs of improvement, and helping to bolster the economy in the face of fiscal headwinds, Fannie Mae said in its 2013 Mid-Year Outlook.
The mortgage giant said that increasing mortgage rates are unlikely to trip up the recovery, since affordability remains near historical highs. But in the wake of a leap in mortgage rates from early May to early June, Fannie Mae said it has raised its forecast for year-end rates by half a percentage point to 4.7 percent.
As the market marches ahead, housing starts and home sales in 2013 should rise by 25 percent and 7 percent, respectively, and for the first time in six years, mortgage debt should tick up, Fannie Mae forecasted.
Despite improvements, home sales remain depressed. But Fannie Mae said it expects new-home sales, homebuilding activity and construction employment to return to normal market conditions by 2016, which would mark a 10-year transition from the housing downturn to a recovery.
Rising home prices should continue to bolster housing, Fannie Mae said, luring buyers into the market and persuading sellers who have waited for their homes to regain value to list them. Indeed, Fannie Mae’s May 2013 National Housing Survey shows that consumer confidence in the market leaped from April to May.
Tight inventory and a drop in distressed home sales have fueled that price appreciation. But recent increases in the supply of existing homes and housing starts should ease that shortage, Fannie Mae said.

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The report said that an improving housing market and consumers who proved unexpectedly resilient in the face of fiscal headwinds helped bolster the economy over the last six months and should continue to in the months ahead, acting as a counterweight to headwinds created by cuts in government spending.
Despite speculation that the Fed may soon begin to wind down its asset-purchasing program, Fannie Mae said that it doesn’t expect that to occur until next year, barring a significant improvement in the jobs market. Analysts say that mortgage rates could rise sharply if the Fed ceased purchasing the $90 billion in mortgage-backed securities and Treasuries that it buys every month.
As the year progresses, the drag of tax hikes and sequestration, which reportedly slashed at least 1 percentage point from GDP in each of the last two quarters, should subside. Meanwhile, the housing recovery, rising household wealth and expanded energy production should stimulate growth.
“At the outset of the year, we forecasted that 2013 would witness sustainable but below-par growth as the economy begins its transition to more normal levels. Halfway through the year, our view is little changed,” said Fannie Mae Chief Economist Doug Duncan. “We expect approximately 2.1 percent growth over the course of 2013, up from the anemic pace of 1.7 percent in 2012.”
“This is consistent with the incremental improvement seen over the past few years but still below the economy’s potential. Our forecast calls for growth to push past 2.5 percent in 2014, boosted largely by tailwinds from the strengthening housing market.”

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