A stronger-than-expected first half of the year pushed the forecast for full-year 2019 headline growth up slightly to 2.2%, despite the escalating trade conflict and the associated risks of financial market volatility, labor market weakness, and loss of consumer resiliency, according to the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group.
With risks to growth now decidedly to the downside, the ESR Group also updated its domestic monetary policy expectations and is calling for two more quarter-point interest rate cuts by the Federal Reserve in 2019, one in September and another in December. Consumer spending continues to be the primary driver of growth, increasing in the second quarter at its strongest pace since the end of 2017, while a surge in government non-defense spending – likely owing to the resumption of uninterrupted employee compensation following the government shutdown – also contributed to strong growth in the first half. By contrast, residential fixed investment dragged for the sixth consecutive quarter, while business investment turned negative in the face of increasing trade and geopolitical uncertainty.
While consumer demand for housing remains strong, limited inventory, particularly on the affordable end, continues to hold back the single-family market, according to the ESR Group. The Fannie Mae Home Purchase Sentiment Index® recorded a new survey high in July, suggesting strong home buyer interest; but even with mortgage rates nearing new lows, the limited availability of homes for sale continues to constrain growth. Consumers who are eligible to refinance are the biggest beneficiaries of the lower mortgage rate environment and – with an expected 35% refinance share of the market in 2019, up from 29% in 2018 – refinances are now driving the ESR Group's improved projection for single-family origination volume in 2019.
"Though the current expansion recently became the longest on record, reverberating trade tensions and general economic uncertainty continue to weigh on growth," said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. "The persistent trade tensions between the U.S. and China threaten to further reduce business investment, disrupt equity markets, degrade household wealth, and diminish consumer spending, the country's primary economic engine of late. To help shield financial markets, buoy consumers, and perhaps nudge inflation slightly higher, we now expect the Fed will cut interest rates by 25 basis points two more times in 2019, up from our previous prediction of one."
"Mortgage rates are approaching the lowest level in recent decades, and as they have moved lower more and more homeowners are finding incentive to refinance," Duncan continued. "We estimate that 35 percent of outstanding mortgages are now 'in the money,' meaning borrowers may realize significant cost savings by refinancing; as such, we expect the share of refinance originations to grow through the remainder of the year. However, while existing homeowners may be able to enjoy the benefits of lower interest rates, many would-be homeowners, and the purchase mortgage market generally, remain unable to capitalize on the favorable rate environment due to the chronically limited supply of homes available for sale."