Fannie Mae’s chief economist expects growth in the U.S. gross domestic product (GDP) this year to be propelled by labor market strength and consumer spending. Housing construction, he says, may contribute to overall economic growth.
Senior Vice President and Chief Economist Doug Duncan said Fannie Mae expects annual growth of 2.1 percent in 2020, a forecast that anticipates an increase in single-family housing starts and no interest-rate moves from the Fed.
Duncan expects single-family housing starts and sales of new homes to increase in 2020. However, tight housing supply and increasing demand likely will continue to increase home prices, which are hovering near or above historical highs in some areas of the country, according to Fannie Mae’s chief economist.
“Affordability is a problem in some places,” Duncan told The Title Report. “For two-income households, affordability is close to normal. But for one-income households affordability is an issue.”
Duncan said there is a segment of the population which always will struggle with affordability due to a lack of stable employment or poor credit history. However, many households have seen an increase in income amid the rise in home prices, keeping home prices relatively affordable in some markets.
“With the rise of women in the workplace, house prices reflect an expectation that the purchasing household will have two incomes. If you go back 30 years or more, they expected one income and maybe a supplemental income,” Duncan pointed out. “The structure of our demographics and households has actually driven a change in house prices. We’re having a different discussion about affordability than we did 30 years ago.”
Duncan said that in some high-cost-of-living areas, such as San Francisco, Seattle and New York, employers are moving jobs to geographic regions where housing is less expensive.
End of the refi gravy train?
During the first three quarters of 2019, the title industry’s written premiums were up 2.5 percent, according to an analysis by the American Land Title Association. For many title companies and underwriters, improving bottom lines in 2019 were driven by an increase in percentages of refinances as interest rates moved downward and home prices escalated.
Can companies in the title industry space expect their percentages of refinances to continue to climb in 2020?
“I would expect that we would see a gradual decline in refinance activity,” Duncan said. “Not everyone sees financial optimization through a mortgage refinance as their primary objective.”
In addition to a decreasing pool of candidates for which a refinance makes financial sense, Duncan said there is sometimes a lack of consumer knowledge about the refinance process and some households are too busy to track daily movements in mortgage rates.
“For borrowers who have paid 15 years on that mortgage most of their payment is principal, not interest, so refinancing doesn’t really do much for them,” Duncan said.
Ominous signs of the past?
One factor that contributed to the housing market crash in 2008 were questionable lending practices that over-leveraged some consumers. Subsequent federal legislation put some safeguards in place to prevent another crash. But have some in the lending space resurrected some of the questionable practices of the past?
“There has been some incremental growth in the non-conforming space,” Duncan noted. “It’s experimentation that’s taking place by lenders who have a higher appetite for risk.”
Fannie Mae’s chief economist said credit conditions in the marketplace are “appropriate.” Underwriting has taken into account what were some of the fundamental problems in the run up to the crisis, according to Duncan. There has been attention paid to underwriting criteria, particularly when it comes to layering of risk, he said.