Affordability is Housing Market’s Greatest Obstacle in 2017: Fannie Mae

Mortgage Market | GoRion Blog

Fannie Mae warns that political uncertainty around the new Republican administration and rising affordability challenges could limit U.S. housing growth in 2017.

U.S. housing market conditions are expected to remain resilient in 2017, but policy uncertainty under Donald Trump and rising affordability challenges will put a cap on growth, Fannie Mae said in its new forecast.  

“Policy changes under the new Administration – in its nature, sequencing, and magnitude – will determine the direction of economic growth in 2017,” Fannie Mae Chief Economist Doug Duncan said in a statement released January 20.

Adds Duncan, “We expect housing to remain resilient and continue its recovery in 2017, with affordability standing out as the industry’s greatest obstacle, particularly for first-time homeowners.”

Countering these forces are favorable demographic factors, which should keep the housing market in expansion mode throughout the year, the government sponsored agency said.[1] Improved consumer spending and a tighter labor market are also cause for optimism.

Fannie Mae expects the U.S. economy to grow just 2% on the year.

Since Donald Trump was elected President, U.S. 30-year mortgage rates have shot up to more than two-year highs. Contract activity appears to have taken a slight hit in response, data on pending home sales from the National Association of Realtors showed last month On balance, housing activity defied expectations in November – the month with the latest available data – as sales of both previously-owned and new homes accelerated.

Data from Freddie Mac, another trillion dollar GSE, show that mortgage rates have moderated in each of the past three weeks. The commitment rate on a 30-year fixed-rate mortgage averaged 4.09% in the week to January 19. That’s down from a high of 4.32% December 29.[2]

Trump’s election brought forth a new promise of faster economic growth by way of fiscal stimulus, major tax cuts and deregulation of certain industries. Combined with efforts to repeal certain legislation, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, Trump’s initiatives have boosted inflation expectations across the board. As we know, higher inflation expectations drive actual prices higher, as Fed Chair Janet Yellen reminded us last week.[3]

Analysts note there is a risk that rates could rise faster than previously forecast, but the impact on residential real estate could be offset by faster income growth. We already saw that in December, when median wages accelerated at the fastest pace in seven years.[4]

Yields on U.S. 10-year Treasury notes rose after Trump’s inauguration on Friday, but finished off session highs. The President’s inauguration speech struck a decidedly protectionist tone, a sign that new Administration will move forward with many of the promises it made on the campaign trail. Yields rise as bond prices decline.

In its January forecast, Fannie said 30-year rates will hover at 4.2% for most of 2017 before rising to 4.3% in the final quarter. That’s lower than other forecasts calling for rates to hover between 4.5% and 5% this year.

Fannie’s outlook on home prices is favorable, as strong demand and tight inventories send market values higher. By the fourth quarter, the median price of a new U.S. home is expected to reach $339,000 – a year-over-year gain of 5%. The median sales price for total existing homes is expected to rise at an annualized 4.7% to $245,000 in Q4.[5]

[1] Matthew Classick (January 20, 2017). “2017 Outlook: Will Policy Changes Extend the Expansion?” Fannie Mae.

[2] Freddie Mac. Mortgage Market Survey Archive.

[3] Sam Bourgi (January 20, 2017). “Yellen Says U.S. Inflation “Much Closer” to Fed’s Target; Unwise to Let Economy Run Too “Hot.”” Economic Calendar.

[4] Rex Nutting (January 25, 2016). “Opinion: Median wages rising at fastest rate in seven years.” Market Watch.

[5] Fannie Mae. January 2017 Housing Market Forecast.

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This article has been exclusively written for GoRion by...

Sam Bourgi

Sam Bourgi

Sam Bourgi has more than seven years of progressive experience in economic analysis, market research, public policy and the financial markets. He has a broad expertise in the financial markets, including commodities, real estate the foreign exchange. As a published author in both peer reviewed and industry research, Sam has covered topics ranging from mortgage-backed securities to consumer spending and labor. Sam's resume includes more than 40 government and industry publications, thousands of financial articles and hours of educational resources on personal finance and trading.

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