Despite substantial revisions to the components constituting real GDP, headline growth expectations on a quarterly and full-year basis were only slightly changed compared to last month, according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. The ESR Group now expects second quarter 2020 real GDP to fall 37.0 percent annualized, compared to the 36.6 percent decline predicted last month, and full-year 2020 GDP of negative 5.4 percent, one-tenth lower than the prior forecast of negative 5.3 percent. Its forecast for full-year 2021 growth, however, improved by one-tenth to 5.3 percent. The revisions to the underlying components reflect expectations that consumer spending and fixed investment will be stronger than previously forecast but largely offset by weaker net exports and business inventories. Risks to the ESR Group’s macroeconomic forecast are largely balanced, with upside risks including an even faster rebound in consumer spending than currently expected, while a sustained resurgence or second wave of COVID-19 following the recent easing of lockdown restrictions remains the greatest downside risk.
The ESR Group also revised upward its forecast for new and existing home sales in 2020, as well as its forecast for refinance originations. The outlook now calls for $1.8 trillion in refinance activity in 2020, a level that would eclipse the refinance wave of 2012. On the purchase side, many homebuyers who intended to buy a home in March or April appear to have delayed that decision, effectively pushing the spring buying season into the early summer. Even so, the steep decline in anticipated year-over-year home sales—in part due to contagion fears and the associated pullback in for-sale inventories—and the slower pace of new home construction compared to 2019, accounts for the forecast of a negative 9.4 percent annualized decline in residential fixed investment. The housing sector is beginning to demonstrate some resiliency, however, with both the consumer-side Home Purchase Sentiment Index and seller-side Mortgage Lender Sentiment Survey reflecting increased optimism and purchase mortgage application volume nearing pre-pandemic levels.
“Housing appears to be providing some support to the overall economy, very much in line with our long-stated view that the slower growth of supply compared to demand would likely limit any downside risk to the housing sector,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “While housing took a big hit this quarter, we believe the further reduction of mortgage rates, persistently low levels of supply, and strong buyer sentiment compared to seller sentiment should continue to provide support to home prices and new construction. It is reasonable to consider whether homebuyer confidence will remain comparatively strong as fiscal policy wanes, lessening support for consumer incomes and businesses. This should test the sustainability of the recently observed pickup in consumer spending following the widespread easing of lockdown restrictions. However, it remains to be seen whether the recent multi-week spike in purchase mortgage activity is driven more by a short-term shift in the timing of purchase decisions or by remote working and social distancing measures sparking a longer-term change in housing preferences, which could sustainably elevate housing sales. Our latest forecast calls for a near-term pick-up followed by a modest pullback in sales in the fourth quarter, after which, in 2021, we expect growth to remain steady. We also expect the extremely low mortgage rate environment to contribute to historically high levels of refinancing activity as household balance sheets and incomes improve.”
Visit the Economic & Strategic Research site to read the full June 2020 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.
