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Fannie Mae predicts strong spring homebuying season

Economy looking weaker, but housing is improving

The economy may not grow at the previously expected rate, but that shouldn’t stop housing from improving in 2015, according to Fannie Mae’s May 2015 Economic Outlook.

The report from Fannie Mae, released Thursday, shows that economic growth is expected to pick up in the second quarter and through the second half of 2015, but continued financial conservatism among consumers suggests only modest growth for the year.

“The pickup from the weak first quarter will likely feel the weight of continued negative economic fundamentals, including a strong U.S. dollar and the lingering impacts of the decline in oil prices last year, which have dragged on manufacturing, net exports, and energy-related investment in equipment and structures,” Fannie Mae said in the report.

Fannie’s Economic & Strategic Research Group is now projecting the economy to grow 2.3% for all of 2015, which is a downgrade of 0.5 percentage points from the prior forecast and similar to the modest pace seen in 2014.

One bright spot in Fannie’s forecast is housing. “Housing is one sector that appears to be building momentum, with leading indicators suggesting the market will experience a strong spring season,” Fannie said.

Fannie cites the mixed bag of home sales seen in the first quarter. Existing home sales jumped in March to the highest level since mid-2013, when the “taper tantrum” choked off budding housing market activity, Fannie noted.

But despite the strong showing at the end of the quarter, existing home sales fell slightly from the fourth quarter of 2014. New single-family home sales fell back slightly in March but closed the first quarter with the strongest pace since 2008. Leading indicators suggest a strong spring season, Fannie said.

Pending home sales increased in March for a third consecutive month amid upward revisions to an already strong increase in February, Fannie noted. Another leading indicator of home sales—purchase mortgage applications—edged up during the first week of May to a fresh high since June 2013, Fannie said.

“Last year we saw a strong second quarter rebound from a weak first quarter. We expect the same pattern this year, but a more muted bounceback,” said Fannie Mae Chief Economist Doug Duncan.

“The drop in oil prices has led to a reduction in business fixed investment, particularly in the mining and energy extraction space, but hasn’t yet translated to a significant increase in personal spending, with consumers remaining financially conservative by choosing to ramp up their savings or pay down their deb,” Duncan said.

“Incoming data point to some strengthening of consumption for the second quarter. We also are seeing positive developments in the housing space, supporting our forecast of moderate but broad-based improvement in 2015 compared to last year,” Duncan added.

“Purchase mortgage applications have moved up consistently for a couple of months, and while refinance applications have recently pulled back, the actual volume of both purchase and refinance originations earlier in the year came in stronger than we had projected,” Duncan concluded.

Because of those results, Duncan said that Fannie Mae raised its mortgage origination forecast to $1.46 trillion for the year.

Fannie cites the recent faster pace of household formation, as a positive, even if all the gains are in renter households, as encouraging. “If income growth continues to improve as we expect, many households should, at some point, switch from renting to owning, especially considering that mortgage rates remain historically low and underwriting standards are becoming more favorable for first-time homebuyers,” Fannie said.

“While our forecast of total home sales is little changed, the outlook for mortgage production continues to be more upbeat, given strong incoming data for both purchase and refinance originations,” Fannie said. “We expect mortgage originations to increase approximately 23% this year to $1.46 trillion—an upgrade from an expected increase of about 14 percent in the prior forecast. We expect the refinance share to rise to 48% from our estimate of 43% for 2014.”

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