Fannie Downgrades Forecasts in Response to Consumer Sentiment

On the heels of Thursday's announcement that the federal government shutdown is coming to a close, ""Fannie Mae"":http://www.fanniemae.com/portal/index.html released its ""outlooks"":http://www.fanniemae.com/portal/research-and-analysis/emma.html for the economy and the housing industry. The outlook, prepared prior to Thursday's announcement, cited fiscal threats and the government shutdown as dampers on the economy and cause for some uncertainty.

[IMAGE]

Overall, Fannie's outlook is ""largely unchanged from the previous forecast,"" although ""fiscal uncertainties associated with the federal government shutdown, the protracted negotiations to raise the debt ceiling, and the timing of the Federal Reserve's tapering of its asset purchase program, pose significant downside risks to economic activity in the current quarter,"" said Doug Duncan, chief economist at Fannie Mae.

The government shutdown and surrounding uncertainty have shaken consumer confidence and led to declining consumer spending, according to Fannie Mae.

As such, the GSE is revising its forecasted GDP growth for this year from 2 percent to 1.9 percent.

As Fannie Mae's economists predicted the shutdown would not last more than two or three weeks and the United States would not default on its debt, they did not anticipate a more significant decline in GDP growth for the year.

In line with Fannie Mae's predictions, President Obama signed a bill to end the government shutdown and raise the debt limit after midnight Wednesday night.

[COLUMN_BREAK]

Over the second quarter, GDP grew at an annualized 2.5 percent, driven largely by consumer spending, according to Fannie Mae.

Fannie Mae expects third-quarter data to relay growth at about 1.9 percent in the third quarter but expects the economy to pick back up in the fourth quarter, ending the year with annualized growth of about 2.5 percent.

Unemployment will continue to decline with an anticipated rate of 7.3 percent in the third quarter before dropping again slightly to 7.2 percent in the fourth quarter, according to Fannie Mae's forecast.

While fiscal policy issues are weighing on consumer confidence, they ""have had only minimal effect on the housing market to date, which continues to improve overall,"" according to Duncan.

""Notably, the rapid appreciation of home prices during the past year has contributed significantly to household net worth gains and may help to cushion some of the fallout from the fiscal policy debate,"" Duncan said.

Third-quarter home sales are expected to come in at about 5.8 million, according to Fannie Mae's estimation, up from 5.5 million in the second quarter.

Mortgage loan originations are falling off somewhat and are expected to decline further in the fourth quarter. Fannie Mae estimates $457 billion in originations in the third quarter and about $387 billion in the fourth quarter.

Refinances are declining their market share, but Fannie Mae expects them to continue to make up more than half of loan originations into the new year. The GSE estimates refinances made up 55 percent of the originations market in the third quarter.

While Fannie Mae did not anticipate the Fed's continuation of its asset purchases, Duncan says, this ""will likely keep mortgage rates low, enabling more homeowners to take advantage of refinance opportunities.""

""[W]e now expect the Fed to start tapering next year and end its asset purchase program in the second half of 2014,"" Fannie Mae stated in its report.

With Janet Yellen--current vice chair of the Federal Reserve--likely to replace Ben Bernanke as chairman, Fannie anticipates ""continuity"" in the Fed's fiscal policy moving forward.