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the latest s e c on da r y m a r k e t a na ly t ic s se r v ic i ng Or ig i nat ion SECONDARY MARKET Ongoing Uncertainty to Unsettle Markets in 2014 As a new year dawns, Fannie Mae expects continued fallout from the end of 2013. I n the aftermath of the federal government shutdown and contentious debt ceiling negotiations, Fannie Mae predicts "continued market volatility" for at least the next few months. Consumer sentiment toward the economy and the housing market wavered in October, according to Fannie Mae's November Economic Outlook. Looking forward, "[s]ince many remaining policy decisions will spill over into the beginning of next year, it seems likely that both consumers and businesses will continue to pull back in the interim, leading to increased volatility in the markets," said Doug Duncan, chief economist at Fannie Mae. The markets await a final budget, a decision regarding the debt ceiling, and the appointment of a new Federal Reserve chair. Overall, Fannie expected 2013 to end with yearly economic growth around 2 percent and an uptick to 2.5 percent next year. The housing market contributed 0.4 percentage points to growth domestic product (GDP) in the third quarter, unchanged from the second quarter, according to the GSE. Existing-home sales declined in September, as did pending home sales, which signal more declines in the next couple months. Single-family home starts "disappointed" last year, according to Fannie Mae. In fact, they began to decline before interest rates began rising. Fannie expected mortgage originations to total about $1.83 trillion for 2013, down about 15 percent from 2012. 60 | The M Report "Sentiment toward housing also worsened following the government shutdown and debt ceiling debate despite low single-family mortgage rates and continued robust year-over-year home price gains," Fannie stated in its outlook. Overall consumption grew at 1.5 percent in the third quarter, well below the longstanding historical norm of 3.4 percent from the end of World War II through 2000, according to Duncan. "Monthly data showed weakening momentum in real consumer spending and suggest a reluctance among consumers to take on more debt," Duncan said. However, while consumers were guarded, businesses "appeared to have shrugged off the fiscal uncertainty," according to Fannie Mae, which reported "the strongest private sector payroll gains since February." Despite the improvement, Fannie reported that members of the Federal Reserve Open Market Committee (FOMC) generally view recent employment gains as "overstating the improvement in labor markets, given the drop in the labor force participation rate." Fannie Mae expects unemployment to fall to 6.5 percent by the middle of 2015. In the meantime, despite fiscal uncertainty and policy issues weighing on the economy, the GSE predicts "sustained improvement" in the labor force will lead to a tapering of Federal Reserve asset purchases in March and a final cutoff in September. Fannie expects the Federal Reserve to hold off on rising interest rates until the second half of 2015. FHFA Reports Another Strong Quarter for Price Appreciation The third quarter of 2013 marked the ninth straight quarter to see prices rise. F ollowing a trend maintained over the past nine quarters, the Federal Housing Finance Agency's (FHFA's) Home Price Index posted an increase over the third quarter. The index, which incorporates sales data from Fannie Mae and Freddie Mac, rose 2 percent over the third quarter and 8.4 percent over the year. Also notable, the third quarter is the first time since 2009 that national home prices are higher than they were five years earlier, according to FHFA. "Overall, the housing market experienced another strong quarter, but price appreciation in the latter part of the quarter was relatively subdued," said Andrew Leventis, principal economist at FHFA. FHFA's calculations are somewhat lower than those calculated by Case Shiller, which reported a 3.2 percent quarterly increase and an 11.2 percent annual increase for the third quarter. FHFA also measured prices on a seasonally adjusted basis over the month, detecting a 0.3 percent increase over the month of September. While the yearly price increase stands at 8.4 percent, when accounting for inflation, prices rose about 7.2 percent over the year, according to FHFA. All 50 states and the District of Columbia experienced rising prices over the year in September, according to FHFA. Nevada posted the steepest price increase over the year in September, according to FHFA—a 25 percent rise. California (23 percent), Arizona (15 percent), Florida (12 percent), and Washington (12 percent) followed. At the other end of the spectrum, Mississippi posted the smallest increase at 1 percent. Wyoming, New Mexico, Connecticut, and Delaware all followed with price gains hovering just above 2 percent. Of the nine Census divisions, prices rose most over the year in the Pacific division: 19.2 percent. No price decreases were reported over the year, but the smallest gain took place in the Middle Atlantic division: 2.9 percent. Over the month of September, the East South Central division posted the greatest price increase: a 1.9 percent gain. The Middle Atlantic and Mountain divisions both posted 0.1 percent declines: the only declines over the month. Two divisions reported no price change: the New England and the West North Central divisions. All 50 states and the District of Columbia experienced rising prices over the year in September, according to FHFA.