Fannie Mae’s Economic and Strategic Research (ESR) Group revised its expectations for full-year 2021 economic growth. In its May 2021 commentary, the group increased its growth forecast to 7 percent from 6.8 percent, attributed to stronger-than-expected first quarter real GDP growth.
“The additional strength in consumer spending was previously projected to occur later in 2021or early 2022, but recent incoming data increasingly points to eagerness on the part of consumers amid continued progress mobilizing COVID-19 vaccinations and waning virus-related restrictions,” Fannie Mae stated in a release.
With its improved expectations for 2021, the ESR Group also downgraded its forecast for 2022 real GDP group to 2.8 percent, a decrease of 0.2 percentage points. Though the group expects the economy to continue to grow over the forecast horizon, it did note there are still increasing risks that could affect this growth, including supply chain disruptions, labor scarcity, and rising inflationary pressure.
Even factoring in the challenge of strong demand with limited supply, the ESR group expects home sales to increase 6.3 percent in 2021. Additionally, despite supply constraints, a lack of buildable lots, and hiring difficulties, it forecasts single-family construction will still be 24.8 percent higher than last year. The group’s mortgage origination forecast has remained unchanged at $4.1 trillion in 2021, but the recently lower mortgage rate environment contributed to a slight shift in its composition, with the expected refinance share ticking up a to 55 percent.
“While most indictors point toward brisk economic growth over the second quarter, the combination of a disappointing employment report and an unexpectedly strong burst of inflation has raised in the minds of many market participants the potential confluence of broad-based supply restraints, very strong house price growth, and the posture of monetary and fiscal policies,” Doug Duncan, Fannie Mae senior vice president and chief economist, said. “Supply constraints across multiple sectors are pointing toward ongoing price pressure, most prominently in microchips and the auto sector. This has yet to significantly affect mortgage rates, except to the extent that the rise in the 10-year Treasury since the beginning of the year contains an increased expected inflation component and has prevented mortgage rates from retreating further from their temporary recent peak.
“Stronger inflation and a resultant move in interest rates are risks that we believe should be monitored,” Duncan added. “As the effects of expansionary monetary policy continue to work their way through the economy, inflationary expectations may continue to rise. This could lead to prices rising further even with growth concurrently slowing in the presence of diminished labor market slack and waning fiscal policy support. If such a scenario were to play out, the question then becomes whether this necessitates a response by the Federal Reserve. While momentum in the housing market will likely continue in the near term, this is an increasingly important consideration for 2022.”