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Domestic Spending to Spur Economic Growth

Mortgage rates and home sales are expected to rise in 2018 according to the latest economic and housing outlook by Fannie Mae. The report expects mortgage rates to rise 30 basis points to 4.4 percent by the end of 2018 as a result of the unexpected spike in long-term interest rates at the start of the year.

The report, which gives a snapshot of what can be expected from the economy during the year, indicated that robust economic growth would continue into 2018 despite the recent market volatility and expects the U.S. economy to post a strong 2.7 percent GDP growth during the year. “Strength in economic fundamentals continues to underpin the current forecast, including recent momentum in domestic demand and a historically healthy labor market,” the report predicted.

The report indicated that the passage of deficit-financed stimulus in this year’s budget was likely to raise additional overheating concerns. The report forecasts the first rate hike of the year in March during the Fed meeting under the new leadership of Fed Chair Jerome Powell.

According to the report, after seeing a surge in spending in the last quarter of 2017, spending growth could moderate in the coming quarters but would remain the primary driver for the country’s economic growth, in part due to increased disposable income from the tax cut. In fact, the stronger disposable household income growth due to the tax cut and strong growth in jobs is also expected to translate into rising new home sales during the year.

“We upped this year’s 30-year fixed mortgage rate forecast by 30 basis points …” said Doug Duncan, Chief Economist at Fannie Mae. “However we don’t expect rates to play much of a role in total home sales, especially with anticipated stronger disposable household income growth.”

During the year, the forecast expects median home prices to rise from $246,000 in 2017 to $259,000. Median prices of new homes are also expected to increase from $320,000 to $337,000.

“The ongoing inventory shortages should continue to constrain sales despite otherwise ripe home buying conditions,” Duncan said.

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