While investment in residential real estate still looks relatively strong for 2010 compared to 2009, the results in the first quarter have been less robust than expected according to Fannie Mae's Economics and Mortgage Market Analysis for March. 

The research piece opens with the following statement:

"Severe weather was disruptive to economic activity during the first two months of the year. If economic fundamentals have not deteriorated, the weather impact will likely fully reverse at some point, and we expect most economic indicators affected adversely by the weather to rebound in the months ahead"

But the monthly report was quick to call attention to those economic fundamentals, pointing toward a much more anemic response to the extension of the housing tax credit than expected.  The report said that "continued recovery in housing is the key to a durable economic recovery, and a renewed decline in activity adds downside risks to that outlook."

The extension of the tax credit did not have the anticipated impact, perhaps because the first round of credits had already pulled much of the qualified pool of first-time buyers into the market.  The smaller credit made available to move-up buyers was not a sufficient inducement to move, especially as buyers had to factor a commission from selling their existing home into the equation.

Still, the government sponsored enterprise views this setback as temporary, and they do expect a rebound later in the year, just not as big a rebound as previously forecast.

Based on a sharp decline in the pending home sales index in January, Fannie Mae's economists expect that home sales will have fallen further in February.  The March report has reduced sales projections for the quarter accordingly, with total homes sales falling from a projected annualized rate of 6.1 million in February to 5.7 million. 

The economists however continue to expect that homes sales will rebound in the second quarter as buyers rush to close sales before the June 30 expiration of the tax credit, but some of these sales will be stolen from the third quarter.  By the end of the year, if employment improves as expected, home sales should resume an upward trend. 

For all of 2010, rather than the 12 percent increase in sales projected earlier, Fannie Mae is now anticipating 9 percent growth in total sales, a total of 6 million homes, along with a continuation of more moderate price declines that started last year.

Because of lower projected home sales, the corporation is also lowering its forecasted mortgage originations for the year to $716 billion for home purchases. Overall originations will decline to $1.31 trillion from a projected $1.97 trillion in 2009 with refinances representing 44 percent of the market. The February projection was $1.33 trillion. Outstanding mortgage debt will accelerate to 2.6 percent, compared to a drop of 1.7 percent last year.

Despite a double-digit drop in real estate investment in the first months of the year rather than the slight increase that had been forecast earlier, Fannie Mae still expects a strong rebound in the second half of the year.  For 2010, residential real estate investment is expected to grow at a 10 percent pace, just slightly below previous forecasts.

Other Items of Interest in the Research...

Construction spending, especially in non-residential and public arenas, fell in January.  Residential construction spending was up, but the increase was entirely attributable to home improvement. 

While the number of housing starts increased, spending on new construction dropped because of sharply lower per-unit costs.  Starts are now 33 percent higher than in January of 2009 and indications are that they will continue to rise in the short term.  (The Commerce Department announced on Tuesday that housing starts fell 5.9 percent in February.) 

In spite of increased starts in January, however, Fannie Mae has reduced its projections for the early part of this year.  The February Housing Forecast projected single-family starts in the first quarter at an annual rate of 550,000, a number that was reduced to 475,000 in the March report.  The second quarter projections were similarly reduced from 625,000 to 575,000.  Projections held firm for the remainder of the year but for the whole year the estimate was down from 614,000 to 583,000.

Sales of both new and existing homes were disappointing.  The report said that, while first quarter home sales had been expected to fall after what had been an unsustainable volume of sales during the fourth quarter, sales appear headed toward a larger downturn than expected.  By the end of January, new home sales had dropped for three consecutive months and were at an annualized rate of slightly over 400,000, below the previous low recorded in January, 2009.  The inventory of new homes also rose for the third straight month to about 1 million homes, a nine-month supply. Existing home sales fell during January for the second month but remain 12 percent above record lows established in early 2009.    

Applications for purchase mortgages are near record lows established in 1997 according to the Mortgage Bankers Association's moving averages of its Purchase Index.  Fannie Mae's projections for the quarter fell from $369 billion in February to $332 billion in March with refinancing accounting for 65 percent of that number.

Fannie Mae lowered its forecast for U.S. gross domestic product to 2.7 percent for the first quarter, from 3.1 percent.

Real (inflation-adjusted) consumer spending grew a solid 0.3 percent in January but appears likely to slow somewhat in February.  The unusually bad weather had an impact on non-auto retail sales but sales still seem to be holding up quite well with chain store sales posting the fifth gain in six months during February.

After 11 consecutive months of decline, outstanding consumer credit increased in January.  Credit card debt continued to decline while non-revolving credit increased.  The decline in consumer credit reflects both a decline in demand for new debt as well as tightened lending standards.