Fannie Mae's Economic and Mortgage Market Analysis for July describes second quarter economic data received so far as "discouraging," and forecasts growth will likely end up at about the same anemic pace as in the first quarter, an annualized rate of 1.9 percent. While the main culprits responsible for the restrained growth are higher gasoline prices and the supply chain disruptions growing out of the cascading disasters following the Japan earthquake, the tepid housing recovery is another reason for the modest pace of economic growth.
"During the two years of the current economic expansion, residential investment has yet to make a contribution to economic growth, the Analysis states." This is unlike other recessions when typically by this point in the recovery housing has added significantly to growth.
The current state of the housing market remains downbeat. Sales of existing homes hit the lowest point in seven months in May and new home sales dipped again after two straight months of growth. One bright spot mentioned in the report was a surge of 8.2 percent in pending home sales in May. However, as we reported here last week, the National Association of Realtors blamed cancellation of many of those contracts, possibly due to financing difficulties, for the further drop in sales of existing homes in June. Another positive is the share of home sales attributable to distressed sales which means less downwardly distorting pressure on home prices from the distressed sale discounts. Consequently median home prices in non-distressed have begun to rise. Fannie Mae economists view this as a seasonal phenomenon, however, and project further deterioration of home prices, perhaps to new lows, when the summer market ends.
Within the new home market supply and demand conditions have become more balanced with a further drop taking the inventory to a record low in May. The inventory-sales ratio (the number of months to deplete the existing inventory at the current pace of sales) is now at 6.2 months, matching its long-term average. Existing homes however are still weighted heavily on the supply side with large numbers of delinquent mortgages creating a shadow inventory of houses. Because of the widely publicized problems with foreclosure processes that emerged in the fall, the time for working through the excess supply and the shadow inventory has increased and will further delay the recovery of the housing market.
Fannie Mae has downgraded its housing outlook for the remainder of the year. Single family housing starts are expected to total 440,000 this year, a 7 percent decline from the 471,000 starts in 2010. This is a downward revision of 20,000 starts since last month's analysis. Projections for starts in 2012 have also been downgraded from 671,000 to 646,000 since the June Analysis.The company's housing survey for June showed a marked deterioration in consumers' expectations of home prices over the next year and is just another piece of survey data showing that consumers remain reluctant to take on large debt.
Home prices are expected to decline further this year and next. The median price in 2010 for a new home was $221,800. This year it is expected to be $216,900 and in 2012 $214,100. Existing homes are expected to sell for a median price of $165,600 this year and $163,700 next, compared to $173,000 in 2010.
Mortgage interest rates will move up just slightly over the year to finish at 4.7 percent and rise again in 2012 to an average of 5 percent. Total mortgage originations in 2011 will decline to $1.07 trillion from $1.51 trillion in 2010 and decline further still next year to $999 billion. Single family mortgage dept will fall an additional 2.6 percent from $10.54 trillion to $10.26 trillion.
The report also points to the vulnerability of the banking sector to mortgage-related risk. Recently the Federal Reserve began to auction off low-quality mortgage-related assets associated with its take-over of AIG. The auctions did not go well and severely disrupted the private label market and caused market participants to mark down asset values on banks' balance sheets. The program has been suspended.
Overall, Fannie Mae's economists do not expect a "quick snap-back" in activity. Among the positives mentioned in the report was a rebound in auto production following the aforementioned supply chain disruptions and strong durable goods report and capital goods orders. However, there was a surprisingly week report on consumer spending and labor market data including employment reports and earnings reports were what Fannie Mae termed "a bust."