Rising Rates and End of QE in 2014 – Fannie Mae

Some of the gist of Fannie Mae’s October Economic
Forecast, released Thursday but written late last week, was made obsolete when
the government shutdown ended last evening, but the company’s economists did correctly
the length of the episode and the ultimate outcome,   Given that they did project a shutdown of two
to three weeks and an eventual raising of the debt ceiling, their economic and
housing market projections based on those guesses are still valid.  Doug Duncan, Orawin T. Velz, and Brian
Hughes-Cromwick lowered their estimate of economic growth in the fourth quarter
from 2.5 to 2.0 percent, bringing full year growth to 1.9 percent compared to
2.0 percent in their last forecast.

The decision
made by the Federal Reserve in September to maintain the pace of asset
purchases has brought long-term interest rates back down and has cushioned some
of the adverse impact of the shutdown and debt ceiling debates however it will
not be enough to offset  some near term
weakening of momentum and fiscal headwinds. 
Fannie Mae’s economists expect the Fed to start tapering next year and
end its asset purchase program in the second half of 2014.  They expect no funds rate hikes until Q3 2015
when they expect unemployment to decline near the magic Fed number of 6.5

Turning to
housing, the economists expect mortgage rates to rise gradually through the
year, averaging 4.4 percent in the fourth quarter and 5.0 percent a year from
now, a figure 20 to 30 basis points lower than their projections last month.

Housing indicators have been generally
positive.  Existing home sales, possibly
reflecting a rush to buy in the face of rising interest rates, rose to their highest
level in six years.  Pending home sales,
however, declined in August for the third month, suggesting a pullback in sales
in the fourth quarter.  So far in 2013
home sales are nearly 12 percent above those in 2012 so even if they decline
sharply in the fourth quarter they will still probably finish the year up 10
percent, slightly stronger than the September forecast.


Home starts were also up in August from
several disappointing prior months and single family permits rose for the
fourth time in five months.  Multifamily
starts and permits were both down. 

The authors say they do not expect the
recent easing of mortgage rates to revive the refinancing boom but it should
provide another window of opportunity for homeowners.  Some appear to be taking advantage of it
according to Mortgage Bankers Association numbers.  Purchasing activity however has seen limited

The three say if the shutdown lasts less
than a month, which it did, the impact on the mortgage market should be
.  The FHA and VA continued to
process new loans despite reduced staff as did lenders with delegated FHA authority.  The shutdown did affect small FHA lenders as
well as issuances through Ginnie Mae.

As the result of an annual benchmark to
recently released Home Mortgage Disclosure Act (HMDA) data for 2012 Fannie Mae
has increased its estimate of total mortgage originations in 2012 by $127
billion to $1.25 trillion which, along with the lowering estimate of interest
rates, led to higher trajectories for originations this year and next.  For all of 2013 they expect total mortgage
originations to fall about 15 percent to $1.83 trillion and refinancing to drop
10 percentage points from an estimated 72 percent in 2012. 

With expected rising mortgage rates through
2014, refinancing originations are
projected to decline further, outweighing the expected
increase in purchase mortgage originations, bringing total
mortgage originations down to $1.36 trillion in 2014. Total single-family mortgage debt outstanding fell
1.8 percent annualized in the second quarter against
their expectation of an increase, and leading to a downgrade of their forecast
to a small decline in 2013, the sixth consecutive annual drop.

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