Fannie Mae's April Economics and Mortgage Market Analysis attributes the current state of temporary weightlessness to a pair of major shocks - the political turmoil which continues in the Middle East and North Africa and the earthquake and resulting nuclear catastrophe in Japan coupled with what it calls multiple cross-currents in both the U.S and Europe. These include budget problems on all levels of government and related cut-backs in spending, concern over federal monetary policy and "rising headline inflation" driven by increasing food and energy prices.
Meanwhile, there appears to be a slowdown in economic activity in the first quarter of the year with consumer spending growth poised to come in well short of the high-water mark set in the fourth quarter of 2010. Business investment and nonresidential investment in structures also slowed and housing is showing renewed softness. Just as the picture begins to seem bleak, Fannie Mae's economists post some good news - more new jobs created in March, an unemployment rate that dropped to its lowest level in two years, and the best quarter for the Dow Jones Industrial Average in 12 years. Despite the overall gloom in the report, Fannie Mae says the contraction in growth is expected to be temporary with a modest acceleration projected for the second half of the year. The group predicts economic growth to average 3.1 percent for 2011, a downgrade from 3.5 percent projected in the March forecast. The key to this outlook is continued improvement in the labor market and moderating oil prices in the second half of the year. Fannie does however exhibit nervous sentiments on the potential for further downgrades, saying "significant challenges lie ahead, which could potentially lower growth this year by much more than we project."
The report calls housing the "Achilles Heel of the Expansion." Activity weakened across the board in February. Existing home sales fell 10 percent, perhaps partially due to earlier weather conditions and distressed sales continue to account for more than a third of total housing sales. The distressed sales are a particular hurdle for the new home market which set a new record low in February and is now 9 percent below the old record set last August. The lack of sales activity has resulted in sharp drops in housing starts which are now only about four percent above the record lows in January 2009 and the second consecutive monthly drop in the issuance of single-family permits suggest continued sluggish home building activity near term.
Distressed sales and a winding down of programs to support the housing market have affected home prices which have shown persistent declines. The FHFA purchase-only price index fell in January for the seventh time in eight months while the CoreLogic and Case-Shiller indices show year-over-year home price appreciation during the firsthalf of 2010 and then renewed declines following expiration of the home buyer tax credits. Market expectations for home prices have deteriorated over the past several months according to multiple surveys of consumers.
Some of the shifts in housing projections since the March report are disquieting. Median prices of existing homes which were projected to float in the $211,000 to $223,000 range through the end of 2012 have been downgraded to a range of $160,300 to $167,500 in the first three quarters of 2011, falling again at the end of this year and beginning of next before recovering to around $167,000 by Q4 2012. Housing starts have been downgraded to 478,000 for the year compared to 508,000 in the March report and total housing sales projections were modified slightly from 5.56 million 5.53million.
Mortgage originations are still projected to total $1.038 billion with 40 percent coming from refinances and the estimate for the 30-year interest rate remains at 5.4 percent at year-end.
Bottom Line: Fannie Mae says home prices are falling right now but interest rates should remain low throughout the year. Sounds like a good time to be a home buyer!
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