2020 Economic Outlook Upgraded In Spite of Significant Downside Risks
Fannie Mae’s 2020 economic outlook projects that housing will continue to remain stable through the first six months of the new year. This upgraded forecast came in the wake of propelling fiscal policies and expected an easing of trade tensions and steady consumer spending. Fannie Mae’s (FNMA/OTCQB) Economic and Strategic Research (ESR) Group put out a commentary with an upgraded forecast for next year; it shows a 1.9 percent increase for real GDP growth.
For the first time in over 18 months, housing showed a marked improvement in the third quarter. The Economic and Strategic Research Group expects this trend to stay healthy and carry through into the first six months of 2020 and the third quarter.
Consumer spending is expected to continue being the key driving point of economic growth as per this 2020 economic outlook. The expectation is that business fixed investment will benefit in 2020 as corporations are upping their expenditures to meet the consistent consumer demand.
Housing- A Growth Contributor In 2020 Economic Outlook
In the near term, housing is predicted to continue being a contributor to growth, which is evident by the rise in sales of existing and new single-family homes in the third quarter. These sales showed an ascent in October for the third time over four months. Single-family sales had hit a three-year low in January, but they slowly moved upwards this year after touching a three-year low in January. However, condo/co-op sales had plateaued.
On an annual basis, there was a rise in sales for the fourth consecutive month, but the year-to-date sales remain a percentage point under the same period, last year. There was a dip in the total number of homes listed for sale on a year-over-year basis, and the down slide has been steady since June.
Total housing starts rose in October, partially improving from a decline in September. These were primarily driven by single-family starts that rose for the fifth consecutive month to the quickest pace since January.
Construction remains exceptionally steady in the South, accounting for 58 percent of the overall single-family building. The projection for home building is encouraging, as there was a rise in total permits, to the height of the expansion. Single-family permits rose at the most rapid rate since August 2007. However, it’s essential to note that there have been consistent affordability and supply constraints that hamper household formation and negatively affect activity in the housing market.
Changes in Projections for 2020 Economic Outlook
While there is a positive trend in macroeconomic data, the risk to a bright 2020 economic outlook continues to be weighed down by various aspects. These include a projected failure in the trade talks between the US and China. The ongoing uncertainty in the political climate abroad is another affecting factor in this aspect. With the muted inflation and variety of downside risks in view, the ESR Group states that early 2020 could bring in one more Federal Reserve rate cut, before halting for the rest of the year.
Doug Duncan, a Senior Vice President & Chief Economist at Fannie Mae, is quoted to have said, “even though international uncertainties rise, they continue to foresee the domestic economy to develop substantial, if not striking, growth.” He also noted, “the third quarter was stronger-than-expected, and this was a contributing factor to the declining revision to their fourth-quarter forecast. Some of the formerly expected fragility in trade and inventories seem had moved back into the current quarter.”
2020 Outlook and Interest Rate Cuts
Nonetheless, consumer spend is likely to be the driving force for expansion forward in the 2020 economic outlook. Now that the budget act has passed and there is a respite in trade tensions, they have revised their forecast and projected an upward growth for 2020.
Duncan further stated that they continue to expect the Federal Government to ax the interest rates not more than once in the foreseeable future. This cut is likely to occur in early 2020 and will help counteract muted inflation. It will act as a hedge against the significant downside risks. He further said- as forecasted, housing growth remained steady and proved to be a support for the economy as a whole in the third quarter. The expectation is that it will stay constant and play a similar supportive role in this 2020 outlook, as forecasted for the first six months of 2020.
In this past quarter, residential fixed investment growth was boosted to a robust annualized pace of 5.1 percent by positive contributions from home improvements, single-family housing construction, and brokers fees. They forecast moderating, yet steady strength as home sales growth and construction activity continue at a measured pace.
With normalcy in the mortgage rate, Duncan said they expect a dip in refinance activity in the forthcoming year. It’s also because this year, there was a drop from the projected 37 percent to 31 percent in the refinance share of originations. Of course, affordability issues and constant supply continue to shackle the housing market in the US as a whole. Duncan said that given the consistent demand for reasonably-priced properties, this trend was quite unfortunate.
In October, the Fannie Mae, Home Purchase Sentiment Index® (HPSI) dropped to 88.8, by 2.7 points, moving even further away from the survey high predicted in August. There was a month over month decrease in five of the six Home Purchase Sentiment Index® components. Included is a net 5-percentage point decline in the “Household Income is Significantly Higher” element and a net 7-percentage point dip in the “Good Time to Buy” portion.
Duncan said that consumer home purchase sentiment continues to be robust, as the HPSI is still close to its survey high despite the decline for a second time in consecutive months. Even with favorable mortgage rates, there has been a significant drop in the ‘good time to buy’ element partly due to the constant challenge of a scarcity of affordable housing supply.
As a result, the net share of consumers expecting a rise in home prices over the last 12 months dropped to its lowest point in seven years. However, an active labor market and low mortgage rates continue to support the overall strength of the index. Duncan said this is consistent with their projection of a subtle rise in home purchase activity during the fourth quarter.
Housing Activity Moves Forth at a Steady Pace in the Fourth Quarter
The Federal Open Market Committee (FOMC) has a meeting on October 29-30. During this meeting, participants noted that global risks and trade uncertainty remain elevated but have eased to some degree.
While they believed the household sector, labor market, and household to be robust, they also projected that global growth concerns and inevitable trade tensions would continue to hamper business fixed investment. Despite the evident strength in the economy, a large number of members believed there was justification, due to inflation expectations and the level of inflation, for the October rate cut.
In regards to future policy actions, most of the participants believed that post the October rate cut, the policy would be structured to support the “moderate growth” outlook. They felt that a material reassessment of the protected economic outlook would be necessary to prompt any more rate cuts.
Mortgage Lenders’ Profit Margin Outlook Touches Survey High
The refinance mortgage demand expectations rose in tandem with the dip in interest rates. As per Fannie Mae’s Q3 2019 Mortgage Lender Sentiment Survey®, the substantial mortgage demand expectations, primarily in the refinance space, resulting in a survey high in the net profit margin outlook for US mortgage lenders. Many lenders thought that the sliding interest rates catalyzed consumer demand, especially for refinance mortgages.
Doug Duncan said that despite tightening in the movement of existing credit standards to net tightening from net easing, the quarter saw lender profitability sentiment hitting a survey high. Operational efficiency and consumer demand were the two factors that seemed to have contributed to the lenders’ upbeat 2020 outlook for profitability.
Cumulatively, the results suggest that the positive profitability outlook by the lenders is being fueled not by the lowered credit standards, but mainly by business fundamentals.
Mortgage Lenders Profit Margin Outlook Survey Highlights
- Mortgage spreads support the steady positive profitability for this 2020 economic outlook.
- The recent broadening of the primary/secondary mortgage spread seems to confirm the profitability that mortgage lenders have reported.
- Mortgage rates generally do not entirely absorb a contemporaneous drop in Treasury rates. To a certain extent, temporary increased hedging costs and capacity constraints for lenders cause this. A broader spread contributes to higher revenues and profits for lenders.
Refinance Mortgage Opportunities
- For refinance mortgages, of loan types (Government, GSE-eligible, and non-GSE-eligible), the overall share of lenders reporting growth in demand over the past three months and forthcoming three months continued their ascent that started in Q1 2019. This upward climb has now reached newer survey highs.
- The projection is that about $4.1 trillion of unpaid principal balances or approximately 40 percent of all outstanding mortgages, would likely experience some benefit from refinancing. They expect the refinance originations’ share to increase through the rest of the year.
Net Tightening for all Government and GSE-Eligible Loans
The lenders providing feedback for this 2020 economic outlook indicated that credit standards resulted in net tightening for government and GSE-eligible loans. Some lenders reported tightening, much more than the share reporting easing.
Non-GSE-Eligible Loans See a Combination of Easing and Tightening
Credit unions and Mortgage banks continued to report a net easing of the credit standards over the previous three months and forthcoming three months for all non-GSE loans. However, the depository institutions showed a net tightening of credit standards over the past and forthcoming three months.
This movement in depository institution interest for retained mortgage risk is in line with the soon-to-be-enacted accounting standard CECL (Current Expected Credit Loss) that will necessitate that banks hold more reserves against any expected losses.
Based on this 2020 economic outlook, avoiding a recession in 2020 requires US households to continue spending. Investors can’t be panicked by aspects like the US presidential election, and there has to be some semblance of peace in global trade wars. If policymakers in China, as well as Europe, did their bit to boost growth, that would help too. From the current climate and landscape, it’s highly likely that these things will happen, and there will be slight growth in the United States’ economy in 2020.