Fannie Mae raised its estimates for 2011 based on improving consumer spending and consumer confidence, increased demand for goods and services, and expected drops in unemployment claims. The government-sponsored enterprise now expects GDP growth of 3.4% next year up from a prior estimate of 2.9%, but warned a weaker-than-expected November jobs report, the continuing economic turmoil in Europe, and potential inflation problems in China pose downside risk. Analysts expect the housing market to rebound in 2011 assuming the "expected stronger labor market materializes." The GSE sees unemployment dropping "toward 9.4%" by the end of next year from the current 9.8%, as "we close 2010 with a sense of building momentum." Fannie Mae forecasts housing starts to increase 18.5% next year with a nearly 20% rise in new home sales and 4% gain in existing home sales for a 5% overall gain. In 2010, total sales fell 7% with a 14.2% drop in new homes sales and a 6.5% decline in existing home sales. The GSE also expects refinancing activity to cool considerably next year shrinking to about 42% of the projected $1.3 trillion in mortgage originations. Refinancings currently account for about three-fourths of mortgage activity. "Despite rising mortgage rates, our forecast for home sales is stronger than the previous forecast, given our brighter economic growth and labor market outlook," Fannie Mae Chief Economist Doug Duncan said. "We expect modest increases in home sales, despite recent interest rate rises, due in part to modest additional declines in home prices, and we expect people to take advantage of affordability as their employment and income outlook brightens." Write to Jason Philyaw.