Fannie's Forecast Sees a Brightening Recovery

Fannie Mae has upgraded its forecast for the third quarter gross domestic product (GDP). It now expects growth at an annualized pace of 30.4 percent, up from the 27.2 percent the company's economists predicted in August. They say that growth has clearly slowed from the days soon after the business shutdowns and orders to shelter in place were gradually lifted by states and cities in May and June, but more recent data points to a continued recovery.

It was originally thought that personal consumption expenditures would fall off significantly as expanded unemployment benefits expired, but they rose 1.6 percent in July, and early data for August suggest that growth continued. Auto sales, one component of the PCE, rose 4.5 percent and credit and debit card transactions appear to have increased as well. There are also indications that business and housing investment will grow at a faster pace in the third quarter than previously thought.

However, while prospects appear slightly rosier for this quarter, the economists have downgraded their GDP growth estimate for the fourth quarter to an annualized 6.2 percent from 8.7 percent in their last forecast. This is based on both a smaller remaining recovery gap and the fading prospect for an additional round of stimulus before the election.

Next year's prospects will probably be limited again by pandemic concerns. Hospitality and travel could take several years to return to normal and "the pace of growth [will] decelerate meaningfully in 2021, as recovery in sectors less harmed by social distancing measures nears completion."

The housing data that has come in since the last Fannie Mae forecast continues to demonstrate a V-rebound which is helping to drive the broader economy. Existing home sales in July were up month-over-month by 24.7 percent to an annualized pace of 5.86 million units, the highest since 2006. The July blowout will probably not be followed by the predicted pullback in August as pending home sales rose 5.9 percent in July, setting the stage for strong closings in 30 to 45 days and purchase mortgage applications were also as high in August as July. Construction measures were also strong; July housing starts were the highest since February.

Pent-up demand from the spring, historically low mortgage rates, and what appears to be an increased interest in moving to suburban areas in at least some metro areas is fueling strong home purchase demand.

While the July pace of sales was in line with Fannie Mae's expectations, the continued strength in August has exceeded them. The company, however, says the pace of sales isn't sustainable given the lack of inventory. New single-family listings have grown modestly on a year-over-year basis, but the growth is much slower than purchase demand. The months' supply of homes for sale as a ratio of sales fell to 3.1 at the end of July, down 26 percent from a year prior and to the lowest level for the month of July in the history of the series. The forecast for existing home sales has been increased for the remainder of the year, but the fourth quarter will probably be down somewhat from the current quarter.