Fannie Mae said today in its July Economic and Strategic Report that the view expressed in these reports since the first of this year has not changed; growth will pick up in the second half of 2013.  Consumer fundamentaks - steady job creation, recovery highs in consumer confidence - are supporting an improving picture of economic activity.   That said, Doug Duncan, Orawin T. Velz, and Brian Hughes-Cromwick of Fannie Mae's Economic and Strategic Research area report, "Disappointing growth during the first quarter was followed by anticipated weakening economic activity in the second quarter."

The economy will face challenges from rising long-term interest rates because of expections for future Federal Reserve monetary actions, but the economists still expect the improving fundamentals, ongoing housing recovery, and receding fiscal drags should help boost growth and inflation adjusted GDP should average about 2.5 percent for the rest of the year and 2.0 percent for the entire year.

The 30-year fixed mortgage rate increased more than 110 basis points from the first week of May to the end of June before easing somewhat in early July.  While rates are still historically low the report calls the recent spike over such a short period of time "significant" and thus it could potentially hurt housing activity.  Incoming data, however, show continued improvement with May existing home sales jumping to the highest level in six years (except for an anomoly the month the homebuyer tax credit was originally scheduled to expire.  New Home sales were up for the third straight month in May to the highest level since July 2008.

While purchase mortgage applications have declined by about 9.0 percent since early May, pending home sales jumped during the same period to the highest level in more than six years, suggesting that existing homes sales were probably strong in the second quarter.  Since cash sales play such a large role in the market - near one-third of existing home sales over the last year - sales may be less sensitive to rate changes than in the past.

While some homebuyers may be knocked out of the market by rising rates, other may jump in as they see rates and prices rising.  The sharp rise in pending sales, if followed by a pullback in subsequent months will confirm if sales are merely being pulled forward.  

Inventories seem to have bottomed out which will relieve some of the pressure on prices and promote more sales compared to the first half of the year when limited inventories and strong investor demand led to multiple offers in many areas.

Homebuilding activity continues to increase with housing starts up in May for both multifamily and single family houses and single family permits increasing for the eighth time in nine months.  Multifamily construction has performed well throughout the recovery while single family building has been more modest and the recovery among the worst in recent history.

Fannie Mae says it expects mortgage rates to continue to rise gradually, averaging 4.7 percent in the fourth quarter, about 40 basis points higher than was projected a month ago.  The forecast of home sales remains about the same - about an 8.0 percent increase in 2013.  The company revised its forecast of housing prices to a median of $276,000 for new homes and $189,000 for existing homes in the fourth quarter of 2013.  In June the forecast had called for median prices of $266,000 and $189,000 respectively by the end of the year.

Fannie Mae is projecting a modest increase in purchase mortgage originations compared with earlier forcests and have lowered projected refinance figures for the second consecutive month due to the surge in mortgage rates.  For the year the forecase is for total mortgage originations to decline to $165 trillion from $2.03 trillion in 2012 with the refinance share droping from 73.0 in 2012 to 62.0 percent in 2013.