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Fannie Mae: Economic rebound on the way for second half of 2016

Pushed forward by consumer spending

Despite the disappointing economic growth in the second quarter, the remainder of the year will bring a rebound, Fannie Mae predicted in its August 2016 Economic and Housing Outlook.

Business investment is struggling, therefore it will be consumer spending that drives the economic growth in the third quarter, the outlook states.

“Second quarter growth was a disappointment, but consumer spending appears solid heading into Q3, and we expect inventory investment to balance out after a surprising drawdown in Q2,” Fannie Mae Chief Economist Doug Duncan said.

“Credit expansion, combined with improving labor market conditions and strengthening household balance sheets, should continue to support consumers, who will likely be the primary driver of growth again in the second half of the year,” Duncan said.

The higher than expected July jobs report shows consumers could benefit from improvement in their incomes and the strengthening hiring trend.

This will likely support a more sustainable pace of inventory accumulation and help soothe concerns over the health of businesses, which face lackluster profits and pulled back on capital expenditures, the report stated.

“The positive July jobs report may encourage some Federal Open Market Committee members to argue for a Fed rate hike at the September meeting. However, we remain convinced that the Fed will hold the target rate steady this year given global uncertainties and anemic output growth,” Duncan said.

“Although much of the financial volatility from Brexit has subsided, long-term Treasury yields continue to face downward pressure and we expect them to remain low for some time,” he said.

There are only three meetings left this year for the FOMC, and the likelihood they’ll raise interest rates above current levels looks slim, judging by the latest meeting minutes released on Wednesday.

“Housing market fundamentals remain a mixed bag,” Duncan said. “During the second quarter of 2016, both new and existing home sales rose to expansion highs, while single-family starts pulled back, remaining historically low for an expansion.”

Actually, Trulia just announced that housing starts increased in July both monthly and annually, therefore homebuyers could soon receive much-needed relief from the competitive housing market and increasing home prices.

“Tight housing inventory from a lack of new construction continues to create affordability challenges, particularly at the lower end of the market,” Duncan said. “Robust rental demand during the second quarter of the year has created the lowest rental vacancy rate in decades.”

“In addition, the homeownership rate dropped to below 63% in the second quarter, but we are seeing some tentative signs of older Millennials moving toward homeownership,” he said.

As Millennials get older, they are increasing homeownership rates faster than in previous years, according to research from Fannie Mae.  

Fewer Millennials are buying homes than previous generations, true. However, as they get older, they are making up for lost time; The rate of increase for Millennials is significantly higher than the rate of increase for previous generations.

“We expect homebuyers will benefit from improving job and wage growth, more favorable lending standards, and continued low mortgage rates through the rest of the year, with the 30-year fixed-rate mortgage rate projected to average 3.4% during the fourth quarter,” Duncan said.

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