Surge in Housing Starts Prompts Fannie Mae to Upgrade its Economic Forecast

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Due in part to the recent surge in housing starts, Fannie Mae has upgraded its economic forecast and is now predicting that housing will take a “lead role” in real GDP growth through 2021.

“We now expect single-family housing starts and sales of new homes to increase substantially, aided by a large uptick in new construction as builders work to replenish inventories drawn down by the recent surge in new home sales activity,” says Doug Duncan, senior vice president and chief economist for Fannie Mae.

In addition, strength in labor markets and consumer spending, both of which are expected to lead to further improvement in business fixed investment, will also contribute to increased GDP growth over the next year, the firm’s Economic and Strategic Research (ESR) Group predicts.

As a result, the ESR Group now projects fourth quarter 2019 headline growth of 1.8% and full-year 2020 growth of 2.1%, each a two-tenths improvement compared to the prior forecast.

Comments from the FOMC indicating an unlikeliness to ease rates further also contributed to the improved forecast. Previously, the ESR Group was predicting one rate cut in early 2020, however, it now expects no moves from the Fed at all next year.

“Housing appears poised to take a leading role in real GDP growth over the forecast horizon for the first time in years, further bolstering our modest-but-solid growth forecasts through 2021,” Duncan says. “In our view, residential fixed investment is likely to benefit from ongoing strength in the labor markets and consumer spending, in addition to the low interest rate environment. Risks to growth have lessened of late, as a ‘Phase One’ U.S.-China trade deal appears to be in place and global growth seems likely to reverse course and accelerate in 2020.

“With these positive economic developments in mind, we now believe that the Fed will hold interest rates steady through 2020,” Duncan says.

Although the pace of home contraction is expected to increase, Duncan cautions that “the supply of homes for sale remains tight and strong demand for housing is continuing to drive home prices higher, particularly in the more entry-level price tiers.”

“This stronger price appreciation is also having the unfortunate effect of partially offsetting savings to potential homebuyers from lower mortgage rates,” he adds.

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