Fannie Mae: Growth In Purchases Won’t Be Enough To Offset Drop In Refis In 2017


In Fannie Mae’s Economic and Housing Outlook for 2017, Doug Duncan, chief economist, says, “Until we can more clearly read the political tea leaves, it’s difficult to say whether this late-cycle expansion will continue into its eighth year.”

MortgageOrb recently met with Duncan and Mark Palim, deputy chief economist, to discuss factors that will impact the mortgage market in the coming year.

Palim says the new administration’s policies and the timing of their implementation likely will have a notable impact on U.S. gross domestic product (GDP) in 2017. He says he expects real GDP growth of 2.0% this year.

Palim also says he expects home prices and sales activity to increase in 2017 compared with 2016. Meanwhile, higher mortgage rates likely will dampen demand for home loan refinancings. Applications to refinance mortgage loans could fall as much as 45% in 2017, Palim says.

What follows are excerpts from our interview.

Q: Fannie Mae’s theme for 2017 is “Will Policy Changes Extend the Expansion?” What impact will policy from U.S. lawmakers have on economic growth?

Palim: In order to extend the expansion, we will need an increase in business investment and continued growth in employment.

Not only is the timing and sequence of legislation important, but the details are critical when it comes to the impact of specific changes on business investment.

If business confidence remains strong and policy changes encourage more investment, we will then need to see if this draws additional workers back into the labor market. If it doesn’t, then the economic benefit of these policy changes may be short-lived. An increase business and government spending would then place upward pressure on wages and inflation, rather than leading to a sustained increase in output.

Q: What is your outlook on economic growth for 2017, and how does that compare to your expectations in 2016? Where did we end 2016 in terms of economic growth?

Palim: We expect continued moderate growth in 2017. Specifically, we expect real GDP growth of 2.0% – little changed from our forecast for moderate growth of 1.9% in 2016. In January of 2016 we were forecasting growth of 2.2%. Refinancing activity could decline as much as 45% this year.

Q: What are your expectations for the Fed’s monetary policy?

Palim: We are expecting two increases in the Fed Funds rate in 2017, which is one fewer than implied by the Fed’s “dot plot.” The Fed has been clear all along that its decision on rates will depend on unfolding economic data.

Q: What is Fannie Mae’s outlook on 30-year, fixed mortgage rates? How will this impact refinancings?

Palim: We forecast mortgage rates to end the year at 4.3%, which is about 20 basis points above where they are now. This is 90 basis points above the recent low of 3.4% in October. Given an increase of that magnitude, it should come as no surprise to hear that we are forecasting a 45% decline in refinance originations in 2017 compared to 2016.

Q: Will the decline in refinancings be offset by a pickup in purchase activity?

Palim: No. While we expect purchase originations to increase by $39 billion in 2017 compared to 2016, this will not offset the decline in refinance originations of $412 billion in our forecast for 2017.

Q: What is Fannie Mae’s outlook on home prices?

Palim: Given relatively low levels of inventory and continued increases in employment, which, consequently, have boosted household formation, we expect home prices at the national level to rise by 5.2% in 2017. We think that the rate of appreciation will moderate to 3.6% in 2018 as single-family starts continue to catch up with household formation.

Q: What are Fannie Mae’s expectations for new home sales? What is the forecast for existing home sales?

Palim: We expect new homes sales to increase 8.7% in 2017, compared to 13.1% in 2016, and existing home sales to grow 1.6% in 2017, compared to 3.3% in 2016.

The modest growth rates predicted are attributable to higher mortgage rates and continued house price appreciation ahead of wage rates, which both contribute to increased affordability issues for potential buyers.

Q: What role will Millennials have in the home sales activity?

Palim: Millennials are playing an increasing role in the purchase market. We are finally seeing meaningful increases in the homeownership rates of millennials, particularly among older millennials – i.e., those over age 30.

Q: Much has been made of the shortage in affordable, entry-level housing. Will this be a driver of home prices in 2017 and what exactly is behind the shortage: regulations, a lack of usable land, or workers?

Palim: This will continue to be an issue. Builders tell us that given the post-crisis cost of acquiring land and permitting, along with a continued shortage of skilled labor, building entry-level homes is a real challenge. The impact of these higher costs is reflected in the size of homes being built. The recovery in single-family construction has been weighted towards larger homes.

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