GDP improved as housing market continued to show strength in Q2

Fannie Mae's latest forecast expects housing market to grow significantly in Q3

GDP improved as housing market continued to show strength in Q2

Despite the recent resurgence in coronavirus cases, consumer spending grew stronger in June, while economic growth picked up speed.

Annual economic growth improved but remained negative, shifting slightly from -5.4% to -4.2%, according to the Fannie Mae Economic and Strategic Research Group's latest Economic and Housing Outlook.

"Our base scenario for the economy improved but did not shift dramatically from last month; we now expect full-year 2020 GDP to decline 4.2% before growing in 2021 by 4.0%," said Fannie Mae Chief Economist Doug Duncan. "Incoming data have improved, but coronavirus infections have spiked as well. Restaurant reservations may have flattened due to virus transmission concerns, but gasoline purchases have risen as many Americans are opting to drive – rather than fly – to their summer vacation destinations, illustrating in part the recovery's unevenness to date."

With a positive turnaround in consumer spending in June, the ESR Group also revised its forecast on home sales activity, home price growth, and purchase mortgage origination accordingly. Residential fixed investment is also anticipated to grow significantly in the third quarter before falling at the end of the year.

"On the housing front, we marked up existing home sales by about 200,000 for all of 2020, which contributed to an upward revision of expected purchase mortgage origination volumes of around $40 billion this year," Duncan said. "We think existing home sales' strength will largely be dictated by inventory constraints and will depend in large part on current owners re-gaining the confidence to list their homes. Additionally, the continued decline in mortgage rates pushed up our refinance volume forecast by about $100 billion. At the current mortgage rate, we estimate that nearly 60% of all outstanding loan balances have at least a half-percentage point incentive to refinance."

The only drawback in the second-quarter forecast of real GDP growth was the massive downsizing in business inventories, according to the ESR Group. This led to a prediction of a 34.8% decline compared to the 37% drop forecasted in June.

In the third quarter, economic growth is set to increase by 7.9% to 27.4%. Fannie Mae said that the trend remains "swoosh-shaped", subject to the changes based on the trajectory of the coronavirus pandemic and its impact on the economy.

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