Tax Credit Expiration Weighs on Fannie Mortgage Origination Outlook

The annual pace of economic growth slowed to 3.2% in Q110, from 5.6% in the previous quarter, according to the latest economic outlook from Fannie Mae (FNM) (download here). Quarterly mortgage originations are projected to fall to $294bn in Q410, while Fannie expects average mortgage rates to rise to as much as 5.5% by year-end. The outlook for housing will remain soft as the first-time homebuyer tax credit expires, excess housing supply weighs on the market, and the amount of shadow inventory remains significant, according to Fannie. “Home sales grew in March, and will likely increase further in coming months, presumably from buyers rushing to sign contracts before the tax credit deadline at the end of April,” said Fannie chief economist Doug Duncan. “We continue to project a pullback in home sales starting in July as the tax credit will likely pull sales forward into the second quarter. The pace of employment growth and confidence in the labor market will be key factors for a pick up in home sales by the end of the year.” Fannie projects quarterly mortgage originations to decline to $294bn in Q410, from $302bn in Q110. But a rebound is expected next year, with quarterly originations rising to as high as $417bn in Q311 before falling back slightly to $381bn in Q411. Fannie found that concerns over the euro-zone’s debt crisis continued to support the Treasury market. A decline in the benchmark 10-year Treasury yield since Fannie’s last forecast was offset by the widening mortgage spread: Fannie expects 30-year fixed mortgage rates to rise by about 50 basis points by the end of the year from their current 5% approximate level. The economy is expected to grow at a 3.5% annual pace this year, but concerns over European sovereign debt and possible long-term effects of the oil spill in the Gulf of Mexico bring uncertainty to the overall 2010 forecast. Write to Diana Golobay. Disclosure: the author holds no relevant investment positions.

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