Expectations for full-year 2021 real GDP growth at 7 percent changed very little from the previous outlook, but meaningful compositional and temporal shifts are now projected for the underlying sources of economic growth. This is according to the July 2021 commentary from the Fannie Mae Economic and Strategic Research Group (ESR).
Modestly weaker-than-expected consumer and construction spending data and an updated federal spending timeline from the Congressional Budget Office led the ESR Group to update its forecast to reflect a larger share of 2021 economic growth occurring in the second half of the year. Second quarter growth is now expected to clock in at 8.1 percent, down from last month’s projected 10.1 percent, while third and fourth quarter growth projections were revised upward by 0.7 and 1.2 percent, respectively, to 7.1 percent and 6.6 percent, according to Fannie.
Additionally, the ESR Group expects business inventory investment and government spending will account for an increasing share of near-term economic growth, as spending by consumers shifts toward services and away from goods. Risks to the forecast are weighted to the downside, including future COVID-19 developments, supply chain and labor shortages, and inflation risk. The ESR Group expects higher-than-consensus levels of inflation through the end of 2022, in part due to anticipation some of the more transitory price pressures will give way to housing-driven inflationary pressure.
Amid record demand for housing and extremely limited inventory in the first half of the year, the ESR Group significantly upgraded its home price forecast, as measured by the FHFA Purchase-Only Index, to 14.8 percent annualized in 2021, up from its prior forecast of 8.0 percent.
However, home purchase demand is expected to soften modestly moving forward. Combined with supply chain disruptions, material costs, and labor shortages easing, which should allow homebuilders to ramp up production. The ESR Group expects home price growth to moderate to 5.1 percent in 2022. In addition to its upgraded home price growth projections, the ESR Group also lowered modestly its interest rate forecast. As such, 2021 mortgage originations are now forecast at $4.2 trillion, up from last month’s forecast of $4.1 trillion, with both purchase and refinance origination activity projected to be higher.
“While recent home price growth has been historically high, we’re forecasting further home price appreciation to moderate through the remainder of the year and into 2022,” Fannie Vice President and Deputy Chief Economist Mark Palim said in a release. “On the supply side, we think homebuilders will be able to increase production as supply chain disruptions and labor shortages alleviate, which should add to the inventory of new and existing homes available for sale.
“On the demand side, we expect the increase in housing demand we saw over the past year to ease, as the impact of unique recent factors lessens, including adjustments to accommodate pandemic-related remote work arrangements, stimulus checks bolstering household savings, and record-low mortgage rates. However, demographic trends remain favorable for a strong housing market over the next few years, and, combined with the chronic undersupply of homes built over the last decade, upward pricing pressure is likely to remain through the forecast horizon – just not at the rate seen this spring,” Palim added. “Nevertheless, we expect home price growth to become one of the more persistent drivers of inflation going forward, as other, more transitory factors diminish.”