Home sales will stabilize this year, with a solid labor market and strong household formations driving demand, Fannie Mae’s Economic and Strategic Research Group stated in its March outlook.

While affordability remains a challenge, Fannie Mae said it has improved thanks to slowing home price appreciation and more attractive mortgage rates.

In the year ahead, the research group predicts that purchase originations will expand while refinance activity will contract.

Fannie Mae Chief Economist Doug Duncan said the group expects to see another year of steady home sales.

“While inventory has improved, it remains low by historical standards – particularly among existing homes – and threatens to derail the spring home-buying season, though a recent jump in single-family starts suggests that new supply is on the way,” Duncan said. “Considering the general inventory shortage and strong demand for housing, affordability remains a key challenge facing the industry, particularly in the conforming space.”

The research group also released its economic forecast for 2019, estimating full-year GDP growth to total 2.2% – a marked decline from 2018’s 3.1%.

The group said the slowdown can be attributed to the fading impact of the Tax Cuts and Jobs Act and a continued deceleration in business investment and consumer spending.

Duncan said the group expects to see growth decline 1.3% in the first quarter of 2019, which would be the slowest quarterly growth rate in more than three years.

“As we weigh the downside risks to the economy – including moderating international growth and trade uncertainty – we now project that the Fed will wait until the fourth quarter to raise rates, if at all,” Duncan said. “However, some ground may have been broken on a path to improved growth, as productivity rose by 1.8% annually last quarter – a clear step above the well-trodden 1 to 1.4% band of the last few years.”