Fannie Mae Cuts Home Sales Forecast. Reduces Origination Outlook Again
Whilerninvestment in residential real estate still looks relatively strong for 2010 compared to 2009,rnthe results in the first quarter have been less robust than expected accordingrnto Fannie Mae's Economics and Mortgage Market Analysis for March.
The research piece opens with the following statement:
“Severe weather was disruptive to economic activity during the first two months of the year. If economic fundamentals have not deteriorated, the weather impact will likely fully reverse at some point, and we expect most economic indicators affected adversely by the weather to rebound in the months ahead“
But the monthly report was quick to call attention to those economic fundamentals, pointing toward a much more anemic response tornthe extension of the housing tax credit than expected. The report said that “continued recoveryrnin housing is the key to a durable economic recovery, and a renewed decline inrnactivity adds downside risks to that outlook.“
The extension of the tax creditrndid not have the anticipated impact, perhaps because the first round ofcreditsrnhad already pulled much of the qualified pool of first-time buyers intothernmarket. The smaller credit madernavailable to move-up buyers was not a sufficient inducement to move,especiallyrnas buyers had to factor a commission from selling their existing homeinto thernequation.
Still, the government sponsored enterprise views this setback as temporary, and they do expect a rebound later in the year, just not as big a rebound as previously forecast.
Based onrna sharp decline in the pending home sales index in January, Fannie Mae'srneconomists expect that home sales will have fallen further in February. TheMarch report has reduced salesrnprojections for the quarter accordingly, with total homes sales fallingfrom arnprojected annualized rate of 6.1 million in February to 5.7 million.
The economists however continue to expect that homesrnsales will rebound in the second quarter as buyers rush to close salesbeforernthe June 30 expiration of the tax credit, but some of these sales willbernstolen from the third quarter. By thernend of the year, if employment improves asexpected, home sales shouldresumernan upward trend.
For all of 2010, rather than the 12rnpercent increase in sales projected earlier, Fannie Mae is nowanticipating 9 percent growth in total sales, a total of 6 millionhomes, alongwith arncontinuation of more moderate price declines that started last year.
Becausernof lower projected home sales, the corporation is also lowering itsforecasted mortgagernoriginations for the year to $716 billion for home purchases. Overalloriginations will decline to $1.31rntrillion from a projected $1.97 trillion in 2009 with refinancesrepresentingrn44 percent of the market. The February projection was $1.33trillion.rnOutstanding mortgage debt will accelerate to 2.6 percent, compared to adrop ofrn1.7 percent last year.
Despiterna double-digit drop in real estate investment in the first months of thern year ratherrnthan the slight increase that had been forecast earlier, Fannie Maestillrnexpects a strong rebound in the second half of the year. For 2010, residential real estate investment is expected to grow at a 10 percent pace, just slightly below previous forecasts.
Other Items of Interest in the Research…
Construction spending, especiallyrnin non-residential and public arenas, fell in January. Residential construction spending was up, butrnthe increase was entirely attributable to home improvement.
While the number of housing starts increased,rnspending on new construction dropped because of sharply lower per-unit costs. Starts are now 33 percent higher than inrnJanuary of 2009 and indications are that they will continue to rise in thernshort term. (The Commerce Departmentrnannounced on Tuesday that housing starts fell 5.9 percent in February.)
In spite of increased starts in January,rnhowever, Fannie Maernhas reduced its projections for the early part of this year. The February Housing Forecast projectedrnsingle-family starts in the first quarter at an annual rate of 550,000, arnnumber that was reduced to 475,000 in the March report. The second quarter projections were similarlyrnreduced from 625,000 to 575,000. rnProjections held firm for the remainder of the year but for the wholernyear the estimate was down from 614,000 to 583,000.
Sales of both new and existingrnhomes were disappointing. The reportrnsaid that, while first quarter home sales had been expected to fall after whatrnhad been an unsustainable volume of sales during the fourth quarter, salesrnappear headed toward a larger downturn than expected. By the end of January, new home sales had droppedrnfor three consecutive months and were at an annualized rate of slightly overrn400,000, below the previous low recorded in January, 2009. The inventory of new homes also rose for thernthird straight month to about 1 million homes, a nine-month supply. Existingrnhome sales fell during January for the second month but remain 12 percent abovernrecord lows established in early 2009.
Applications for purchasernmortgages are near record lows established in 1997 according to the MortgagernBankers Association's moving averages of its Purchase Index. Fannie Mae's projections for the quarter fellrnfrom $369 billion in February to $332 billion in March with refinancingrnaccounting for 65 percent of that number.
Fannie Mae lowered its forecast forrnU.S. gross domestic product to 2.7 percent for the first quarter, from 3.1rnpercent.
Real (inflation-adjusted)rnconsumer spending grew a solid 0.3 percent in January but appears likely tornslow somewhat in February. The unusuallyrnbad weather had an impact on non-auto retail sales but sales still seem to be holdingrnup quite well with chain store sales posting the fifth gain in six monthsrnduring February.
After 11 consecutive monthsrnof decline, outstanding consumer credit increased in January. Credit card debt continued to decline whilernnon-revolving credit increased. Therndecline in consumer credit reflects both a decline in demand for new debt asrnwell as tightened lending standards.
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