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Economic Headwinds Won’t Affect Year-End or 2016 GDP Growth

growthSoft economic growth in Q4 to this point has done nothing to change Fannie Mae’s forecast for economic growth forecast for 2016, as current economic conditions suggest that that a long-anticipated increase in the federal funds target rate will be announced Wednesday afternoon, according to Fannie Mae’s December 2015 Economic Outlook released Tuesday.

Despite persistent economic headwinds, Fannie Mae’s Economic &Strategic Research (ESR) Group is predicting real GDP growth at a rate of 2.2 percent for the entire year of 2015 in its December forecast. The rate of GDP growth is expected to rise to 2.4 percent for 2016. Both numbers are consistent with the ESR Group’s prior forecasts. Real consumer spending is expected to pick up in 2016 after slowing in Q4 amid a tightening labor market and declining gasoline prices, which the ESR group expects will offset some of those persistent headwinds.

Other factors that remain downside risks to growth include the possibility of a sharp slowdown in China and other emerging market economies, a further rise in the dollar, and geopolitical turmoil, according to the ESR Group.

“After a year of modest improvement, we continue to believe economic growth will close out 2015 at 2.2 percent before gaining momentum early in 2016,” said Fannie Mae Chief Economist Doug Duncan. “Overall conditions suggest the Fed will begin to raise the fed funds rate at the December Federal Open Market Committee meeting, but we don’t expect the financial markets to experience any sizable shocks as a result.”

While the ESR group expects home sales to remain subdued for the near term, they noted that private residential construction has been strong in Q4 and that housing demand is up headed into 2016. The result will be an increase in total home sales for the year, according to the ESR Group.

“The rebound in purchase applications suggests that sales will gain momentum in the first quarter after retreating slightly in the current quarter,” Duncan said. “For all of 2016, total home sales are projected to rise 3.9 percent. We believe that further easing of mortgage lending standards will combine with a positive household formation outlook to help the housing sector expand.”

The lack of housing inventory this year has been more problematic for the existing home market, according to the ESR Group. The drop in for-sale inventory of 4.5 percent in October was the largest in two years, and only twice this in 2015 did for-sale inventory increase on a year-over-year basis. One reason for the thin existing home inventory is that institutional investors are taking advantage of the high demand for rent by holding housing units as rentals.

“We do not expect the inventory crunch to ease substantially next year, and the situation could get worse if geographic mobility declines or if homeowners are locked in with low interest rate mortgages in a rising rate environment,” the ESR Group said in its report.

Despite volatility in the market this year, home sales are poised to have their best year since 2007 with an increase of 7.4 percent up to 5.8 million units.

Click here to view the Fannie Mae ESR Group’s site, which contains all the December 2015 data.

About Author: Staff Writer


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