Fannie Mae Economists Lower First Quarter Forecast

Unpleasant surprises in January home sales and home starts have convinced Fannie Mae’s economists to lower significantly their projection of real residential investment in the first quarter released yesterday.

Instead of the slight increase forecast late last year, they are calling for a double-digit drop in the first quarter, but a strong rebound in the second half of the year. For the year, Fannie’s economists still have real residential investment growing about 10 percent, just slightly lower than previously forecast.

The economists, Dave Duncan and Orawin Velz, now believe the second tax credit will be much less effective than the first.

“The 2009 first-time homebuyer tax credit may have dried up the pool of qualified first-time homebuyers. In addition, while the tax credit was extended to cover repeat buyers, the amount of the credit was smaller than that for first-time homebuyers. The tax incentives may not be enough to induce many homeowners to move, given that current homeowners generally must incur commission costs to sell their current homes, a cost not incurred by first-time homebuyers,” they wrote.

However, despite the poor start for the year they continue to expect home sales to rebound in the second quarter, as homebuyers rush to close sales before the expiration of the second tax credit in June, and they still see the year ending on a positive note.

“In the third quarter, we expect a payback as the tax credit will likely pull some of the demand forward. By the end of the year, if the labor market improves as expected, sales should start to trend up on a sustainable basis. For all of 2010, we project a nine percent increase in total home sales, compared with an increase of 12 percent in the previous forecast. Home price declines moderated in 2009 and we expect the trend to continue this year,” the forecast said.