Economic Outlook
Provided by Fannie Mae's Economics & Mortgage Market Analysis Group
June 2008

• Housing market. The housing market continues to weaken. While home sales were mixed (with new sales increasing and existing sales falling in April), we expect that the combination of a weak economy, stalled or declining employment and ongoing dislocations in credit markets will continue to slow housing starts and sales this year. We expect single-family housing starts to fall by nearly 40 percent and total home sales to decline by 18 percent in 2008. That said, the recent up-tick in the Pending Sales Index is a probable indicator that the decline is slowing and the bottom is approaching. We expect housing starts to stabilize near the end of the year with sustained but modest gains beginning in 2009. The total number of unsold homes remains near record levels and the number of vacant homes for sale is at an all-time record. The months supply (inventory/sales ratio) is also still at very high levels. These elements will continue to put downward pressure on house prices and this pressure is likely to extend through mid-2009. The tight credit conditions, which have started to ease in non-mortgage market segments, will continue to be a drag on the inventory reduction process.
• Mortgage market. The projected decline in home sales and prices will likely lead to a 26-percent decline in purchase originations to $0.9 trillion in 2008 (the lowest level since 2001). Tighter credit standards combined with expected continued home price declines will keep borrowers (and some investors) out of the market. We expect refinancing to remain proportionally high this year, at about 52 percent of mortgage originations with a volume of $0.99 trillion. Ref inancing will be buoyed by borrowers, (especially those with upwardly-adjusting ARMs), taking advantage of the still-low fixed-rate mortgage rates. The ARM share of the number of mortgage applications is expected to stay fairly constant at about 10 to 11 percent as consumers forgo the small spread between fixed- and adjustable-rate mortgages. Growth in single-family mortgage debt outstanding (MDO) is projected to slow dramatically this year with the slowdown in purchase originations and expected slowdown in cash-out refinancing and other mortgage equity withdrawal. We expect single-family MDO growth to be 2.3 percent in 2008 and to slow a bit more in 2009.