Referring to its "roller-coaster pattern of economic growth," Fannie Mae summarized the economy and housing in 2014 as a year that started with a deep hole and ended with a whimper. A brutally cold first quarter put economic growth in that deep hole at the beginning but it came back "with a vengeance" making the second quarter the strongest for growth in more than two years. The third quarter saw growth flag again and it "is poised to weaken further, as some unsustainable forces that drove activity in the third quarter reverse in the final quarter."
Fannie Mae's Macroeconomic Forecasting Team headed by Senior Vice President and Chief Economist Doug Duncan reprise 2014 in the December edition of its Economic and Strategic Research report. They see the year overall as one in which economic growth comes in at what they call an unspectacular pace of 2.1 percent, 1 percentage point below the 2013 pace. Next year however will be better, driven by improving private domestic demand, a better outlook for consumer income, rising consumer and business confidence, a broadening housing recovery and they expect full year 2015 growth of 2.7 percent.
The rising trend of the "quits rate," a key indicator of labor market confidence from the Job Openings and Labor Turnover Survey (JOLTS) supports, the Team says, its view that wage gains are poised to accelerate. Private wages in the Employment Cost Index tend to lag the quits rate. Such improving income prospects they say are key to increasing the sub-par rate of housing formation but the full recovery of the housing sector will require truly meaningful gains in that income.
This year has been a disappointing one for housing recovery. Improvement was tentative, especially for the single-family sector which was held back first by the aforementioned severe winter weather and then by a spike in mortgage rates. While rates have stabilized, demand remains low as homebuyers have not yet moved aggressively into the void left by exiting investors.
Recent indicators, the economists say, have been generally positive; existing home sales were up in both September and October, increasing to the highest levels since the previous fall, and inventories reached their lowest levels since March. New home sales, however, improved little in the last half of the year.
Nonetheless the National Association of Home Builders' measure of builder confidence rebounded sharply in November although building itself has been mixed all year. Multifamily building starts have been the strongest since 2006 and are expected to post double-digit gains for the fourth straight year while single family permits and starts have been much more modest with starts up only 10 percent from last year. All residential construction starts are expected to come in below one million units which the economists called "anemic" by historical standards.
Most of the major indexes continue to show price growth moderating. Still tight inventories continue to support healthy price gains even in the face of soft homebuyer demand.
The Team says it expects 2015 will bring "a broad-based but measured housing recovery amid improving consumer sentiment and income growth, slowly easing lending standards, and continued historically low mortgage rates." Long term Treasury yield will remain depressed because of soft spots in several of the globe's economies and they expect that, as the Federal Reserve begins to raise short-term interest rates in the third quarter of 2015, the yield curve will flatten further. Fixed mortgage interest rates are expected to stay below 4.5 percent through 2015, continuing to support the housing market.
Fannie Mae projects housing starts will increase about 22 percent and total home sales will grow about by about 5 percent after finishing 2014 down 3 percent. Applications for refinancing, according to the Mortgage Bankers Association, have plummeted, "setting the stage for a purchase market in 2015."
Total mortgage applications are expected to edge up next year, after falling almost 40 percent this year. Fannie Mae projects originations to total $1.13 trillion reflecting an increase in purchasing that will slightly more than offset an expected decline in refinancing of 37 percent. This drop will be in addition to an expected decrease of 40 percent in refinancing in 2014 and 60 percent in 2013. Total single-family (1- to 4-unit properties) mortgage debt outstanding should post a slight decline in 2014 before picking up modestly in coming years.
