Could Housing Buoy Economy in 2020?

Fannie Mae economists have upgraded the economic outlook for the coming year, and a big reason behind that is expected growth in the housing market. Housing added to economic growth in the third quarter for the first time in more than a year and a half. That momentum will likely continue in the fourth quarter and the first half of 2020, according to the latest forecast from Fannie Mae’s Economic and Strategic Research Group.

While consumer spending will be the primary driver of economic growth, housing should continue to function as a positive contributor in the near term, economists say. Both new and existing single-family home sales rose in the third quarter, as did pending home sales, housing permits, and starts, the paper notes.

That said, researchers note that challenges persist in housing, particularly the supply and affordability constraints that are holding back household formations and inhibiting some market activity.

Other risks to the economy include ongoing trade tensions between the U.S. and China as well as ongoing political uncertainty abroad. Still, Fannie Mae economists are predicting one more rate cut from the Federal Reserve in early 2020 before a pause for the remainder of the year.

“Even as global uncertainties mount, we continue to expect the domestic economy to produce solid, if not spectacular, growth,” says Doug Duncan, Fannie Mae’s senior vice president and chief economist. “As we forecasted, housing supported the larger economy in the third quarter, and we expect it to continue to play a productive role through the first half of 2020. Positive contributions from single-family housing construction, home improvements, and broker fees pushed residential fixed investment growth to a robust 5.1 percent annualized pace this past quarter, and we forecast continued but moderating strength as construction activity and home sales growth continue at a slower pace.”

With mortgage rates normalizing, Duncan says they expect a decline in refinance activity in 2020. The refinance share of mortgage originations will likely drop from a projected 37% in 2019 to 31%.