The fiscal headwinds from tax hikes and sequestration should restrain economic growth and counter the tailwinds from housing as well as the continued Federal Reserve ultra-easy monetary policy.
Thus, 2013 economic growth will come in at about 2.3% — remaining modest by recovery standards, Fannie Mae said in its latest outlook.
Nonetheless, the continued housing recovery and rising home prices are expected to provided a cushion for growth this year and present the most likely source of upswing in the economy.
“The April forecast reflects the growing realization that 2013 is off to a good start from a gross domestic product perspective, but we expect the stronger-than-expected first quarter pace to slow somewhat in the second quarter,” said Doug Duncan, chief economist of Fannie Mae.
He added, “On the downside, tax hikes, sequestration, and the euro-zone crisis still pose significant risks to our forecast, and the fiscal tightening will likely affect consumer spending and other economic activity in coming months. However, the housing recovery continues to broaden and may be more robust than we anticipate, helping to offset fiscal headwinds.”
Meanwhile, residential investment has also made a positive contribution to economic growth for seven consecutive quarters, ending in 2012, with similar activity expected in 2013, the report stated.
Housing’s contribution to growth also continues to climb as home sales reached multi-year highs in the early stages of the year.
For instance, existing home sales edged up in February for the second month in a row to a three-year high, boosted by condo sales in the South, according to Fannie Mae.
Housing starts posted a modest gain, but housing permits — a leading indicator of building activity — suggest a substantial gain in homebuilding activity again this year.
However, builders’ confidence has stalled with the Wells Fargo/National Association of Home Builders housing market index slipping in March for the second consecutive month to its lowest level since October.
“One positive takeaway is that the index’s forward-looking component—sales expectations over the next six months—rose during the month for a second consecutive month, helping to buffer the decline in the overall index,” according to the government-sponsored enterprise.
Meanwhile, continued rising home prices should help some homeowners, who have involuntarily remained on the sidelines, to gradually put their homes on the market.
“Besides helping underwater borrowers regain their positive equity positions and boost household net worth, rising home prices should increase banks’ willingness to make mortgage loans, as they are gaining more confidence that the collateral they are lending against will hold its value,” the report stated.
Overall, the housing recovery is expected to march on due to low mortgage rates continuing to support the market.
“We expect multifamily housing starts to rise in 2013 by another 19%, with single-family starts rising approximately 24%,” according to the GSE.