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2017 growth to remain flat despite improved economic confidence

January 6, 2017 | By

Uncertainty over the President-elect’s policies is driving a 1.8 percent growth projection for this year from Fannie Mae’s Economic & Strategic Research Group. That would make 2017 the third straight year of modest growth, according to the group’s December outlook.

“The tenor of our forecast effectively remains unchanged: Signs of cautious consumers this quarter, rising interest rates, the renewed increase in the U.S. dollar to a 14-year high, and heightened uncertainty in the political sphere suggest conservatism in our outlook,” Fannie Mae Chief Economist Doug Duncan says.

Following the U.S. election in November, long-term interest rates continued trending higher. Last month, the Federal Open Market Committee voted to raise the target interest rate, as expected. The Fed’s second rate hike in a decade moved the federal funds rate, the rate at which banks lend to each other overnight, to 0.50-0.75 percent, from 0.25-0.50 percent.

Maintaining Optimism

Despite the uncertainty, consumers and homebuilders are more optimistic than some economists expected. According to The Conference Board’s monthly measurement, the Consumer Confidence Index reached 113.7 in December, compared to 109.4 in November and 100.8 in October. December’s index, which includes indexes for expectations and for the present situation, was the highest since 2001.

“Consumer confidence improved further in December, due solely to increasing expectations, which hit a 13-year high (Dec. 2003, 107.4),” says Lynn Franco, director of economic indicators at The Conference Board. “The post-election surge in optimism for the economy, jobs, and income prospects, as well as for stock prices which reached a 13-year high, was most pronounced among older consumers. Consumers’ assessment of current conditions, which declined, still suggests that economic growth continued through the final months of 2016.”

“Looking ahead to 2017, consumers’ continued optimism will depend on whether or not their expectations are realized,” she adds.

Builder Confidence Soars

Meanwhile, builder confidence in the market for new single-family homes is at its highest level since July 2005, according to last month’s National Association of Home Builders/Wells Fargo Housing Market Index.

“While we are encouraged that confidence is rising across investors, consumers, businesses, economists, and homebuilders, much of it appears to be in anticipation that the forthcoming Administration and the new Congress will enact fiscal policies and deregulation that will help spur growth,” Duncan says. “While we believe that some pro-growth policies could be adopted next year, it would take time for them to benefit the economy, barring any offsetting initiatives such as more restrictive trade policies.”

Economic Growth Could Benefit Housing

Whether homebuyers will consider 2017 a good time to buy a home will depend on several factors, according to Duncan.

“The recent surge in interest rates amid continued strong home price appreciation is likely to present affordability challenges to home buyers, especially for young adults who are looking to enter the housing market for the first time,” adds Duncan. “However, stronger economic growth, if it materializes, should help support incomes, affordability, and the ongoing housing recovery.”

The Fannie Mae Economic & Strategic Research Group expects mortgage rates to rise gradually, from an average of 3.8 percent this quarter to 4.2 percent a year from now. That’s about 50 basis points higher than the previous forecast. They project an increase in total home sales of nearly 3 percent in 2017, little-changed from the prior forecast. Their 2017 sales outlook hinges on expectations of a slow rise in interest rates, continued improvement in household income, and a positive trend in household formations.

Estimates, forecasts, and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions, and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) Group guarantees that the information in this article is accurate, current, or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR Group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

 

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