Freddie Mac: Government Shutdown Slowed Housing Recovery

Posted by Patrick Barnard on October 23, 2013 No Comments
Categories : Required Reading

Following an unexpected drop in existing home sales in September, the housing recovery lost additional steam in early October due to the government shutdown and its impact on consumer confidence, according to Freddie Mac's U.S. Economic and Housing Market Outlook.

However, the government-sponsored enterprise (GSE) forecasts that the recovery will continue into next year – albeit at a slower pace.

‘The housing recovery keeps chugging along despite a constant barrage of disruptions to the broader economy,’ says Frank Nothaft, vice president and chief economist for Freddie Mac, in a statement. ‘We're likely going to see the housing recovery slow down, but not shut down, as we close out the rest of this year due to tight inventories in many markets, rising mortgage rates and slumping consumer confidence. Fortunately, the housing recovery should continue to absorb the economic shocks in stride and improve next year.’

With mortgage rates on the rise and home prices spiking in many areas due to limited inventory, it has become more challenging for homebuyers to find and close on homes in recent months. What's more, Americans lost some confidence in the economy after Congress failed to approve a budget by Sept. 30, resulting in a partial shutdown of the government that lasted until Oct. 17.

These same factors are also cited in sister GSE Fannie Mae's October economic outlook report as having a potential impact on the recovery.

‘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,’ says Doug Duncan, chief economist for Fannie Mae, in the report dated Oct. 17 (the day the government reopened). ‘In particular, the contentious Congressional negotiations that led ultimately to Congress raising the debt ceiling may have a lingering effect on consumer attitudes and spending, as was seen following the 2011 negotiations.’

It also didn't help when reports emerged that lenders were having challenges processing mortgage applications due to the shutdown – not the least of which was lack of access to important IRS documentation.

As a result of these and other factors, Fannie Mae is revised its full-year economic growth forecast to 1.9%, down from 2%.

Similarly, Freddie Mac revised down its fourth quarter economic growth forecast by 0.5%.

The impact of the shutdown was on top of an unexpected decrease in existing home sales reported for September. According to the National Association of Realtors (NAR), after hitting the highest level in nearly four years, existing home sales dipped 1.9%, on a seasonally adjusted basis, compared to August.

Although home sales have remained above year-ago levels for the past two years, they have slowed considerably in recent months, due mainly to rising interest rates.

Lawrence Yun, chief economist for the NAR, says, ‘rising mortgage interest rates will further lower affordability in upcoming months. Next month, we may see some delays associated with the government shutdown."

Freddie Mac is forecasting that mortgage rates will rise to an average of 4.3% by the end of the year and can be expected to head higher in 2014.Â

Inventories will remain tight due to negative equity, a declining supply of distressed sales and a severely depressed level of new construction. The GSE registered a five-month supply as of September.

What's more, new residential and multifamily construction is expected to fall short of demand: The GSE forecasts that the U.S. economy will add fewer than 1 million housing units in 2013 and around only 1.15 million in 2014 – significantly below normal levels – due mainly to a lack of skilled labor in the construction market.

‘Expect the ramping up of residential construction to take awhile, and while economic growth will improve over the next year, the economy won't be operating at full potential until sometime after 2015,’ Freddie Mac states in its report.

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