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Despite Housing Shortage, Growth Prospects Hold Firm

Fannie Mae’s Economic and Strategic Research (ESR) Group held steady on an earlier forecast, predicting 3 total percent growth for 2018 and 2.3 percent growth for 2019 in their October 2018 Economic and Housing Outlook report. This comes in spite of expectations that third-quarter growth would be higher than previously predicted.

The ESR Group indicated that growth stagnated from the second quarter’s 4.2 percent annualized rate to 3.3 percent. This slowdown in growth comes hand-in-hand with quarter-over-quarter deceleration in consumer spending, business investment growth, and trade. The ESR Group also cast residential fixed investment as having fallen for a third consecutive quarter—the product of rising interest rates causing a decline in home sales and mortgage demand.  And while the housing supply has shown modest improvement, the shortage of inventory is still causing a squeeze across much of the nation’s lower-priced tiers.

“This month we slightly adjusted upward our forecast for third-quarter real GDP growth, largely because of an upgraded projection of consumer spending growth; however, our calls for growth on an annual basis remain unchanged—both this year and next,” said Doug Duncan, Chief Economist with Fannie Mae. “Despite the expected return of trade as a drag on growth and moderating consumer spending and business investment growth, a swing from a drawdown in business inventories to a buildup likely offset some of those negatives. Economic conditions remain supportive of additional rate hikes in 2018 and 2019, as the labor market has tightened and inflation continues to hover just above the Fed’s 2-percent target.”

For those worried trade tensions under the Trump Administration could dim prospects for the housing market, Duncan agreed, but ultimately finds rising interests and uncertainty among prospective homebuyers more troublesome.  

“Trade and the potential contagion of Italy’s financial turmoil to elsewhere in the Euro area present downside risks to our forecast,” Duncan said. “Our expectations for housing have become more pessimistic: rising interest rates and declining housing sentiment from both consumers and lenders led us to lower our home sales forecast over the duration of 2018 and through 2019.”

Still, Duncan closes on a positive note. “Meanwhile, affordability, especially for first-time homebuyers, remains atop the list of challenges facing the housing market,” he said.

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