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TH E M R EP O RT | 55 O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST DATA The Positives and Negatives of an Impending Slowdown A Fannie Mae report expects GDP to slow down, but also sheds light on a silver lining. D espite expectations that the Federal Reserve will significantly ease monetary policy through the end of the year, the Fannie Mae Economic and Strategic Research (ESR) Group expects 2019 and 2020 real GDP growth to slow to 2.1% and 1.6%, respectively. This prediction has been driven by an inverted yield curve, weak business investment, waning consumer and business sentiment, and ongoing trade and global growth concerns. The ESR Group also predicted that the Fed will cut interest rates by 25 basis points in July, followed by an- other 25 basis points in December. "As the current U.S. expansion celebrates its tenth anniversary, it does so under an economic backdrop of growing domestic and global uncertainty—and slowing growth," said Doug Duncan, SVP and Chief Economist, Fannie Mae. "The heightened uncertainty, stem- ming in part from the seemingly intractable trade dispute between the U.S. and China, appears to have reduced busi- ness' investment incentive, which is now poised to be a material drag on growth over the forecast period. With consumer spending the principal remaining GDP growth driver, in addition to the recent re-inversion of the yield curve suggesting that market participants expect economic activity to slow further, we believe that the Fed will take a more accommodative posture beginning with a rate cut at the July meeting of the FOMC." The ESR Group notes that housing continues to benefit from the lower mortgage rate environ- ment. Total origination volume is expected to improve 7% in 2019 on the back of a surge in refinances and moderate house price growth. Refinance activity is expected to represent 32% of originations in 2019, up from 29% in 2018 and more than 2%age points higher than was forecast last month. "Housing remains a net positive to the economy, as the industry anticipates growth fueled by strong household balance sheets, low mortgage rates, and a surge in refinancing activity," Duncan continued. "However, the hous- ing industry still doesn't have an answer to the related problems of low supply and affordability. While home price appreciation has largely moderated—particular- ly compared to the recent past— and demand for modestly priced homes has proven strong and resilient, the lack of affordable inventory continues to cap sales and limit the potential pool of would-be homeowners." The Dichotomy of the Housing Market Why is new and existing construction activity declining despite increased spending? B uildFax's latest Housing Health Report revealed year-over-year declines in single-family housing authorizations, as they have fallen 2.75% since 2018. Also seeing declines are existing housing mainte- nance volume (0.75%) and existing remodel volume (0.33%). The report uses U.S. property condition and history data to deliver economic trends, includes information on the states that had the largest year-over-year increase in average mainte- nance costs. "So far, 2019 has revealed a dichotomy in the housing market—new and existing construction activity is declin- ing steadily, while the spend on these projects is increasing consistently," said Holly Tachovsky, CEO, BuildFax. "Spending is rising, in part, due to increased tariffs on construction materials, tightening labor and construc- tion markets and an uptick in natural disaster activity." The report states that while main- tenance volumes declined 0.75%, spending rose 6.68%, and remodel spend- ing grew 2.47% de- spite a decline in the volume of remodels. Colorado had the highest year-over- year construction spending increase at 26.50%. Washington and Florida also saw increases of 17.79% and 13%, respectively. "Colorado, Florida, and Washington have seen the greatest increases in maintenance spend year-over-year, which may in- dicate a relationship between elevated construction costs and national affordability challenges. We expect that construction spending on the existing housing stock will eventually start declining as demand slows," Tachovsky said. "As we move further into 2019, we will be monitoring whether these indica- tors begin to move in parallel to evaluate if such a shift in the housing market is realized." Although there are sections of the nation that saw increases in construction costs, the latest Producer Price Index (PPI) shows that the prices paid for materials used in residential construction decreased 1.1% in June, breaking a four-month trend of increases. The decrease in the PPI, released by the National Association of Home Builders, is only the fifth time in the past two years where home prices fell. "So far, 2019 has revealed a dichotomy in the housing market—new and existing construction activity is declining steadily, while the spend on these projects is increasing consistently." —Holly Tachovsky, CEO, BuildFax