Consumer spending remains the primary driver of the current economic expansion, according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. Demand for homes is especially high, but limited supply continues to be a concern. The ESR believes that the Fed will cut interest rates two more times in 2019 but notes risks remain biased to the downside, as trade tensions, a potential no-deal Brexit, and other concerns weigh on the markets.
The current low interest rate environment may be supportive of new construction, but according to the ESR Group, a low number of existing homes will lead to lower its existing sales growth forecast in 2019 to negative 0.3%. Total mortgage originations in 2019 are still expected to rise 11.6% year over year, due largely to another upward revision in projected refinance activity, which, according to the recently released Mortgage Lender Sentiment Survey, lenders now report as driving their surging profit margin outlooks.
“Domestic economic data continue to paint a picture of generally positive fundamentals amid a backdrop of continued volatility and uncertainty,” said Fannie Mae SVP and Chief Economist Doug Duncan. “Consumer spending remains the engine driving the economy forward, but faltering business investment and worrying downside risks, including the ongoing trade tensions between the U.S. and China, could become a heavier weight on growth. It appears the Fed is prepared to help insure against downside risks by easing further, and we’re maintaining our forecast that the Committee will cut rates two more times in 2019 – this week and again in December.”
“The housing story remains primarily one of imbalance between demand and supply,” continued Duncan. “Both our consumer and lender attitudinal surveys hit new highs this month due to near-historically low mortgage rates and generally favorable household balance sheets, but inventory constraints, particularly in the affordable space, continue to hold back housing market sales volume. Refreshingly, in the absence of existing stock, homebuilders appear to be increasingly focused on entry-level homes, as the median square footage of new single-family construction fell 4.3% in the second quarter.”