Fannie Mae Sees Modest Improvement Ahead for Housing

""Fannie Mae's"":http://www.fanniemae.com latest market outlook continues to call for a ""modest improvement"" in housing activity this year, although the prevalence of distressed properties on the market has led to renewed weakness in home prices and the industry's shadow inventory looms large.

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The GSE's chief economist notes that as the economic recovery approaches its two-year anniversary in June, housing has not yet contributed to economic growth in any meaningful way and is significantly underperforming compared to previous market recoveries going all the way back to 1954.

Doug Duncan says since the start of the current recovery, real residential investment growth has been weak compared to that of previous recoveries.

After the boost from the homebuyer tax credit in the second quarter of 2010, real residential investment dropped below the level observed at the start of the recovery and dropped to a record low of 2.2 percent of GDP during the first quarter of this year, Duncan explained. Its recent peak was more than 6 percent of GDP at the end of 2005.

The D.C.-based GSE's lead economist says while existing home sales have posted modest rebounds since the end of the tax credit, it's important to note that distressed homes continue to account for a large share of sales, and that share has risen in recent months.

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Home prices are showing renewed signs of weakness amid the rising share of distressed home sales, Duncan says, adding that the large price discounts associated with the rising distressed share also serve to depress appraisal values and can cause difficulties in the underwriting process.

The ""National Association of Realtors"":http://www.realtor.org says its members in the field have reported that an increasing number of contracts are being cancelled because the appraisal came in below the price negotiated between buyer and seller.

Fannie Mae is forecasting existing-home sales to increase by about 6 percent this year over sales volume in 2010. With the growing share of discounted distressed properties, though, the company's economic team expects the median price for an existing home to close 2011 about $6,300 below last year at $163,600.

The GSE is projecting mortgage rates to move up just slightly over the course of the year amid modest economic growth and the close of the Federal Reserve's bond-buying spree, rising to about 5.2 percent by the end of this year.

Still-low mortgage rates, coupled with depressed property values, mean high housing affordability and a continued improvement in the labor market should help lift housing activity in the second half of the year, according to Duncan.

Duncan says the U.S. Census Bureau's latest Housing Vacancy Survey includes a category of vacant homes that can offer some insight on the shadow supply of housing - vacant homes that are held off market for unspecified reasons, which rose sharply during the first quarter.

This category of vacant homes also includes homes in the foreclosure process. The jump, according to Duncan, may have been attributable to the large number of homes stuck in the foreclosure process due to servicer foreclosure problems. Such delays serve to prolong the staying power of the industry's shadow inventory.

The Census survey ""generally indicated the lack of improvement in the excess supply and the shadow supply of housing in early 2011,"" Duncan said.