Fannie Mae's (OTC Bulletin Board: FNMA) Economic & Strategic Research (ESR) Group lowered its full-year economic growth forecast to 1.7%, down from 1.9% growth in the prior forecast and 2.2% at the start of the year. The downgrade is due largely to disappointing first quarter growth of 0.5%. The ESR Group expects economic growth to bounce back as we move through 2016 amid improved financial conditions, with consumer spending remaining an engine for growth and the housing and government sectors making positive contributions. However, it will not be sufficient enough to overcome the damage done during the first quarter of the year.

"Consumers and businesses showed caution at the end of the first quarter," said Fannie Mae Chief Economist Doug Duncan. "Job creation slowed in April and participation in the labor force gave back some of the recent gains. Nevertheless, the uptick in both hours worked and average hourly earnings should boost labor income and help support consumer spending in the current quarter. In addition, we saw a healthy rebound in April auto sales and greater demand for consumer loans. While the Fed appears to be less worried about financial turmoil abroad, the vote on whether the U.K. will leave the European Union, scheduled to occur about a week after the June Federal Open Market Committee meeting, should keep the Fed from raising interest rates next month."

"Home sales are expected to pick up heading into the spring season amid the backdrop of declining mortgage rates, rising pending home sales and purchase mortgage applications, and continued easing of lending standards on residential mortgage loans," said Duncan. "Meanwhile, the home ownership rate showed signs of stabilizing during the first quarter of this year, as the relatively high home ownership rates among Baby Boomers have helped offset low home ownership rates among Millennials, many of whom remain on the sidelines due to ongoing affordability issues."

Visit the Economic & Strategic Research site at to read the full May 2016 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.

Here's the text of the housing section of the May report:

Home sales moved moderately higher in the first quarter of 2016 from the prior quarter despite lackluster month-to-month activity. New home sales fell in March for the third consecutive month, while total existing home sales rebounded in March but failed to completely reverse the sharp drop in February. Through the first three months of this year, existing home sales and new home sales were 5.6% and 1.5% higher, respectively, than sales during the same period last year. Leading indicators suggest that home sales will pick up going into the spring season. Pending home sales rose in March for a second consecutive month, and the average purchase mortgage application index picked up 4.0% in April for a second straight month, as the average 30-year fixed mortgage rate edged lower in April from March, according to Freddie Mac. In addition, the Fed’s Senior Loan Officer Opinion Survey for the three months ending in April showed that banks reported having eased lending standards on most types of residential mortgage loans amid firming demand.

Home building activity disappointed in the first quarter. Both total housing starts and building permits declined from the prior quarter, with volatile multifamily (more than one unit structures) starts being the culprit, dropping for the third consecutive quarter after a surge in the second quarter of 2015, partly due to the sharp increase in the Northeast before construction tax incentives in New York State expired. One of the main headwinds for multifamily construction is excess supply of upper-end apartment buildings in the top ten most populous cities. However, affordable rental units have plenty of room for growth. (For more information on rental market conditions, read the May 2016 Multifamily Market Commentary). The financing environment for new multifamily construction has become more difficult, according to the Fed's Senior Loan Officer Opinion Survey, as a net percentage of banks reported tightening lending standards for multifamily commercial real estate (CRE) loans over the past three months, a second consecutive quarter of tightening.

Year-over-year comparisons are positive for the single- family segment, with single-family starts about 22% above the level in 2015, compared with flat multifamily starts. Nonetheless, the trend in the single-family segment was still lackluster, as the double-digit gain was from still- depressed levels.

Meanwhile, the main measures of home prices, including the Case-Shiller, the FHFA purchase-only, and the CoreLogic indices, showed strong annual appreciation of 5.3% to 6.0% during the first two months of 2016. Lean inventory and declining distressed sales have continued to support home price gains.

The home ownership rate has shown tentative signs of stabilizing, according to the Census Bureau’s Housing Vacancy Survey. The home ownership rate (not seasonally adjusted) for the first quarter of 2016 edged down 0.3 percentage points from the prior quarter and 0.2 percentage points from one year ago to 63.5%, a level around which the rate has hovered for the past four quarters. One factor helping to support the overall rate is that the large Baby Boom generation is still at a point in the life cycle with high home ownership rates, which has helped offset the low home ownership rates among the even larger Millennial generation in young adulthood.

Our forecast for mortgage rates is little changed from the prior forecast, with 30-year fixed mortgage rates at 3.7% during the fourth quarter of 2016. We raised our total home sales forecast in 2016, as the upward revision in existing home sales slightly outpaced the downward revision in new home sales. We revised lower our outlook for single- family and multifamily starts this year.

For mortgage originations, incoming data for 2016 for both purchase and refinance originations have been stronger than we expected, leading us to upgrade our estimates for the first quarter and for the rest of 2016. For purchase originations, we lowered our assumed share of home sales using cash through the first quarter of 2017. For all of 2016, we expect total mortgage originations to decline 3.7% from 2015 to $1.65 trillion, as the 18.8% drop in refinance originations outpaces the 9.4% rise in purchase originations. The refinance share should decline to 39% in 2016 from 46% in 2015. Total originations should decline further in 2017, as a drop in refinance originations continues to outweigh an increase in purchase originations. We project total production volume to be $1.45 trillion in 2017, with the refinance share sliding further to 30%.