Fannie Mae Sees Faster Fed Rate Hikes

Fannie Mae has moved its projected
timeline for further Federal Reserve price hikes forward by several
months.  The company’s Economic
Strategic Research (ESR) Group points to an increase in the Fed’s favored measure
of inflation, the personal consumption expenditures (PCE) deflator, which
increased by 0.1 percent in February, bringing it 2.1 percent higher than a
year ago.  This was the first time in
nearly five years
the PCE had exceeded the Fed’s 2.0 percent target. 

Combined with the unemployment rate which
was down 0.2 percent to 4.5 percent in March, the ESR says “firming inflation
will prod the Fed to raise the fed funds rate in June and September, compared
with September and December in the prior (ESR) forecast.” The minutes of the
March Federal Open Market Committee (FOMC) meeting also point to an upcoming
change in the committee’s reinvestment policy
, one that would begin shrinking
the Fed’s balance sheet and its huge portfolio of Treasury and mortgage-backed

The ESR’s April issue of Economic Developments notes that that
reports from the housing sector during the first two months of the year were
more upbeat than from other parts of the economy, partly because of
unseasonably warm weather.  Single-family
starts were up and the National Association of Home Builders’ index of builder
confidence jumped by 6 points in March, the largest increase since the housing
crisis.  Multi-family starts and overall
residential permitting however were both down.

Forward-looking indicators of home sales –
pending sales and purchase mortgage applications – are both up, but the
potentially faster pace of Fed rate increases, as noted above, pose a downside
risk to home sales.  Extremely low
for-sale inventory is also expected to private a headwind to the spring home
selling season.  Declines in household
mobility are suppressing the supply.

Fannie Mae’s Home Purchase Sentiment Index
gave back some of the previous months’ gains in March as consumers
overwhelmingly expect rates to rise and fewer feel that this is a good time to either
buy or sell a home.  Contributing to this
a continuing high rate of annual price appreciation, 7.0 percent according to
the CoreLogic Home Price Index, although slightly less per other indices.

Fannie Mae sees a slight uptick in
inventories, perhaps as some sellers chose to lock in profits from recent price
increases, and this, along with buyers jumping into the market before rates
rise further, should push home sales up by 3.0 percent this year.  The company is still forecasting that 30-year
fixed rate mortgages should have an average rate of 4.3 percent by year’s end
and that mortgage originations will decline by about 20 percent this year to
$1.58 trillion.  The refinance share will
drop by 50 percent from 32 percent last year to 16 percent in 2017.

In non-housing areas, Fannie Mae sees
economic growth remaining at 2.0 percent in 2017, “unconvinced that a
meaningful positive impact from stimulative fiscal policy will occur this year.”  First quarter growth appears not to have met
expectations, but they expect improvement in the second quarter. 

Near-term risks to the economy include a
potential government shutdown on April 29 and policy uncertainty delaying
investment decisions.  The economic
impact of a short shutdown would be minor because federal pay is usually made
up retroactively, but a shutdown would weigh on consumer and business

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