Economic Growth Expected to Accelerate through Spring as COVID-19 Lockdown Restrictions Ease

Tuesday, March 23rd, 2021

As vaccines deploy and social lockdown measures continue to ease, U.S. economic expansion is expected to accelerate this spring, with real GDP growth hitting 8.4 percent in the second quarter and 6.6 percent for the full year before moderating in 2022, according to the March 2021 commentary from the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group. The ESR Group's latest forecast includes only modest and intertemporal revisions to the topline economic numbers, reflecting recent developments registering mostly offsetting impacts to growth, including stronger-than-expected consumer spending data, weather- and energy-related disruptions across wide swaths of the country, new details regarding the stimulus bill, showing some government expenditures to be later than previously expected, and updated interest rate expectations. Right now, risks to further economic recovery remain largely neutral and include changes to the future path of the COVID-19 virus, including variants, as well as the continued easing of social distancing restrictions and uncertainty over the extent to which consumers will deploy surging personal savings in coming quarters.

The ESR Group does not believe recent interest rate increases to be a major concern in the near term. However, any meaningful acceleration in inflation expectations and interest rates could pose risks not only to economic growth but also to housing activity and mortgage originations, in particular. Please refer to the this month's longer-form commentary, beginning with "Our Thinking on Interest Rates," for additional details and scenarios.

Housing activity is expected to remain resilient in the near-term even in the face of further modest increases in mortgage rates. Mortgage originations are likely to be adversely affected, however, due to weakening of refinance mortgage demand. In 2021, the refinance share of origination activity is forecast to dip to 54 percent, down from 64 percent in 2020; and by 2022 the refinance share is expected to hit 39 percent, as mortgage rates creep higher and the pool of outstanding mortgages with incentive to refinance continues to decline. Purchase demand, meanwhile, is expected to remain relatively steady over the forecast horizon, with $1.82 trillion expected in 2021, up from $1.61 trillion in 2020, and another $1.80 trillion expected in 2022.

"At the moment, economists' eyes are on interest rates given the size of the recent increases to Treasury and mortgage rates and the short time period over which those changes occurred," said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. "Perspective is helpful here: While we forecast some continued upward movement, mortgage rates remain historically low, as they are still 0.8 percentage points below the 2019 average. Underlying Treasury rates have risen, though lenders have absorbed some of the rise by shrinking spreads, as confirmed by our recent Mortgage Lender Sentiment Survey® results. While the rate rise will curtail refinances to some degree, 2021 is poised to be a good year overall for housing activity and housing finance, as the economy continues to recover and COVID-19 restrictions ease. We expect a brisk acceleration in economic growth in coming months. As always, there are downside risks to our forecast, and many center around monetary and fiscal policy impacts on interest rates going forward."

Visit the Economic & Strategic Research site at fanniemae.com to read the full March 2021 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae's Economic & Strategic Research Group, please click here.