Fannie Mae Expects Low Rates to hold through 2014

Thanks to
problems in Europe and the slowing of both the US and Chinese economies,
consumer attitudes have plateaued after several months of improvement early in
the year.  Fannie Mae’s Economic Forecast
for June, released Tuesday, said that the lull in employment gains is
particularly troubling and while the probability of a renewed recession has not
risen, the risks to growth have shifted to the side of slower growth.

Prospects for
economic growth have been revised down to 1.9 percent annualized from an
earlier estimate of 2.2 percent as a result of less inventory buildup and
smaller consumer and government spending. 
Lower inventories, however, will be positive going forward as they will
not present a drag on growth.

Fannie Mae’s
economists see a brightening housing picture saying that after the record lows
in single family home sales and housing starts last year the housing sector
appeared to be turning the corner in the first quarter; the slow pace of new
construction and delays in foreclosures have combined to bring about a more balanced
housing market.  Indicators showed some
loss of momentum late in the quarter, possibly because unseasonably warm weather
pulled some activity forward but April data showed improvement in sales and
starts so the housing recovery seems to be back on track.  

Despite
positive news on home prices, with many measures showing prices firming and
distressed sales shares declining, Fannie Mae projects further declines in
prices through the end of the year.

Lower
mortgage rates
have boosted interest in refinancing, with mortgage applications
for refinancing rising to the highest level since February-although activity is
still below the levels seen during the fall of 2010.  One goal of refinancing programs has been to
boost economic activity but household desire to deleverage and the inability to
extract equity from underwater homes has somewhat limited the stimulative
effects of refinancing although it has strengthened household finances longer
term.

The
multi-family construction sector has improved faster than the single-family
segment, with year-to-date building activity running more than 40 percent ahead
of last year’s activity. The sector should continue to perform well this year,
as fundamentals continue to improve, with rising rents and net absorption far
outpacing completions.

The
continued flight to quality prompted by the European situation has kept
interest rates low and Fannie Mae expects them to remain low and a support to
the housing industry through the year.

Fannie Mae says they expect Operation
Twist to be completed at the end of June as planned and that the target Fed
funds rate will remain unchanged until at least late 2014.  While additional easing in on the table it
will likely require significant deterioration in the economy before it is
implemented and the company does not expect an asset purchase program.

…(read more)

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