The Fannie Mae Economic and Strategic Research (ESR) Group released its assessment of the impact of the COVID-19 pandemic, projecting back-to-back quarters of negative real GDP growth for the first half of 2020 that would officially establish a recession being underway.
The projections expect a historically large contraction in the second quarter of approximately 25 percent annualized. The contraction reflects major declines in employment, consumer spending, and business investment. However, ESR anticipates full-year 2020 output to contract just 3.1 percent with a growth rebound of 4.8 percent in 2021. The length and magnitude of the virus-related shutdowns are seen as the driving forces of recession, with the forecast skewed to the downside, yet much is still unclear.
Housing is a key sector under stress from the pandemic, with ESR Group predicting a slowing of the market, reflected in declines in purchase mortgage originations and fewer new for-sale listings due to growing caution by both sellers and buyers. The second quarter and the balance of 2020 is forecast to show a sharp decline, while the low interest rates is expected to bolster refinance activity in that period.
“The historically rapid decline in economic activity, the accompanying employment loss, and our limited, though improving, understanding of COVID-19 make this a particularly challenging forecast environment,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. The projections acknowledge the economic downdraft that is in motion, but unprecedented monetary and fiscal policy responses poise the economy for a “solid-but-incomplete recovery exiting 2020.”
While lower interest rates bring a purchasing benefit, rising unemployment will more than offset, adversely impacting overall demand. On the supply side, those attempting to sell is also expected to decline based on caution of showing homes to strangers during a pandemic or whether their price is satisfying given that previously it may have been much higher. Overall a 15 percent decline in home sales in 2020 is projected that will reduce purchase originations from $1.28 trillion in 2019 to $1.11 trillion in 2020. Inversely, refinances are expected to go up in 2020 by approximately $400 billion to $1.41 trillion.”
