Will U.S. policy keep the nation’s economic expansion alive in 2017?

February 13, 2017 |

Policies U.S. lawmakers set on issues like taxes, trade, and immigration will partly determine the drivers and pace of economic growth and housing activity in 2017, according to Doug Duncan and Mark Palim, Fannie Mae’s chief economist and deputy chief economist, respectively.

“Each year we pick a theme. Last year it was ‘Housing Affordability Constrains as the Expansion Matures.’ This year’s theme is ‘Will Policy Change Extend the Expansion?’” says Duncan.

The two Fannie Mae economists expect the U.S. real gross domestic product to grow 2.0 percent this year, up slightly from 1.9 percent in 2016. A year ago, Fannie Mae’s Economic & Strategic Research (ESR) group was forecasting growth of 1.8 percent in 2017.

They expect the Federal Reserve to hike interest rates twice in 2017.

Read more: Consumer housing sentiment continues to cool, despite post-election economic confidence

Jobs and Economic Growth

According to the forecast, consumer spending is likely to be the primary driver of growth this year, with gains in income and strong employment. “While employment growth has moderated, the unemployment rate is down about as far as it can reasonably go, which bodes well for consumers,” says Palim.

According to Duncan, the question is whether workers who have not participated in the labor market will return. Much of that depends on businesses increasing their fixed investment expenditures.

“Business fixed investment in this expansion has been historically weak. Businesses don’t expect the growth in demand for their products and services, so they are not investing in the expansion of plants and equipment,” says Duncan. “That lack of investment in plants and equipment has contributed to a decline in productivity. Productivity gains drive real income growth for workers. And this is why we have seen historically slow growth in incomes during this expansion.”

2017 Expectations

Fannie Mae’s ESR Group expects 1.23 million housing starts this year, up from 1.17 million in 2016. They are forecasting 849,000 single-family starts, up from 785,000 last year.

“Current U.S. demographic trends suggest that we require housing production of 1.5 million to 1.6 million units annually to maintain a balance between supply and demand,” says Duncan.

The industry will ring up 6.1 million home sales in 2017, according to the forecast. That’s up from 6.0 million in 2016. The forecast expects a rise in new-home sales to 616,000, from 566,000 last year. And it expects sales of existing homes to rise to 5.5 million units, from 5.4 million units.

Fannie Mae economists are forecasting that prices of U.S. single-family homes will rise 5.2 percent in 2017. That’s compared to 5.7 percent in  2016. These forecasts are for nominal home prices, not inflation-adjusted price gains.

Read more: Home prices rose this year in every state except these two

Meanwhile, Fannie Mae economists expect borrowing costs for homebuyers to increase in 2017. They expect the rate for the most common home loan, the 30-year fixed-rate mortgage, to average 4.2 percent this year. The average was 3.6 percent in 2016.

“The post-election rise in rates, which we forecast to continue into 2017, is tied to market expectations of forthcoming changes in economic policy,” says Duncan. “Some market participants anticipate that those policies could add to inflationary pressures, and the higher nominal interest rates reflect that sentiment.”

This expected rise in mortgage rates likely will reduce the volume of home loan refinancings in 2017, according to Duncan. He forecasts refinancing volume will total $510 billion in 2017, down from $922 billion in 2016. Purchase volume will climb to be at $1.1 billion, up from $1.0 billion.

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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