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2015: Economy Drags Housing Upward

We present a preview of the key theme that will shape our outlook for the U.S. economy, housing, and mortgage markets 

over the coming year in our inaugural outlook for 2015 as we have done over the past several years. We believe that 

economic growth will accelerate modestly this year, driven by strengthening private domestic demand, especially 

consumer spending, amid continued low gasoline prices, firming labor market conditions, rising household net worth 

through both financial and housing wealth, improving consumer and business confidence, and reduced fiscal headwinds. 

We project that growth will accelerate to 3.1 percent in 2015 from our estimate of 2.6 percent in 2014. The stronger 

economic backdrop should lead to improving income prospects, underpinning a higher rate of household formation in 

2015. 

Housing, which has historically acted as an early driver of economic expansions, has lagged the progress of the overall 

economy in the current cycle. We expect that the strength in the broader economy, accompanied by meaningful income 

growth, should drag housing upward amid historically low mortgage rates and a gradual easing of lending standards. We 

expect that 2015 will mark a year of a moderate improvement in broad-based housing activity following a disappointing 

and uneven year for the housing recovery in 2014.

Downside risks to this outlook include the wait for income growth to materialize domestically, uncertainty regarding the 

pace and effects of monetary policy normalization, slowing global growth, and continued geopolitical tensions, including 

renewed concerns of a Greek exit from the Eurozone and the potential for currency market turbulence.

Private Forces Moved to the Fore in 2014

Our theme last year proved prescient as, after starting the year in 

deep negative territory due in large part to the severe winter 

weather, the economy rebounded strongly in the second quarter 

and gained even more momentum in the third quarter, reaching the 

strongest pace since 2003. Incoming data for the fourth quarter 

support our prior forecast that growth likely slowed markedly 

toward the end the year. Private domestic demand posted solid 

back-to-back growth in the second and third quarters and is poised 

for another healthy gain in the fourth quarter, as reduced 

uncertainty on the fiscal policy and regulatory fronts and 

diminishing drags from a cut in government spending set up a 

foundation for private forces to come to the fore.

Oil Prices Fall Off a Cliff

One of the major surprises of 2014 was the collapse in oil prices. This is a sign of both declining demand amid weakening 

global growth and an increase in supply, stemming from increased production in North America and unwillingness among 

key oil producing countries to cut production. This has occurred in tandem with a strengthening of the dollar to its highest 

level since 1994. Falling prices of other commodities (such as copper) have added to disinflationary pressures, which 

appear to have been important contributors to the bond rally, flattening yield curves, and widening credit spreads. The 10-

year U.S. Treasury yield moved below 2.0 percent in early January, underscoring investors' concerns over the uncertain 

global economic outlook and potential deflation. At the same time, West Texas Intermediate crude oil fell below the 

psychological threshold of $50 per barrel for the first time since 2009, or more than half the price at the beginning of 2014. 

This has occurred despite some supply disruption, as Libya has entered a civil war that has effectively cut its oil 

production in half, erasing almost half of the supply overhang in the global oil market. While the U.S. has become a bigger 

energy producer in recent years, lower oil prices are a net positive to the U.S. economy. The consumer and producer 

benefit of lower energy costs should offset any drag on economic growth from the stronger dollar and employment and 

business investment weakness in oil producing regions. 
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When Will Monetary Policy “Normalization” Begin?

Short-term interest rates have been near zero since late 2008 

while inflation pressure has remained muted. Thanks in part to the 

stronger dollar and declining gasoline prices, inflation has recently 

moved well below the Fed’s 2.0 percent target. The backdrop of 

lackluster growth and low inflation around the globe appears to 

justify a cautious pace of rate hike by the Fed. In the statement 

following the December meeting of the Federal Open Market 

Committee (FOMC), the Fed adjusted its forward guidance, noting 

it would be “patient” in rate normalization. However, the minutes 

from the meeting showed that the FOMC sees the plunge in oil 

prices and the stronger dollar as creating only a temporary drop in 

inflation.

Meanwhile, labor market conditions have improved substantially, but diminishing labor market slack has not yet translated 

into stronger wage growth. Many Fed officials have noted that the decline in the unemployment rate over the past year 

has overstated the degree of improvement in the labor market, as part of the drop was a result of the decline in the labor 

force participation rate. We continue to expect the first hike in the target fed funds rate in the third quarter of this year with 

no change in the balance sheet policy until 2016. The pace of tightening is projected to be gradual, with the fed funds rate 

rising to below 2.0 percent by the end of 2016. The yield curve should flatten further as short-term rates rise while longerterm rates will likely remain well-anchored. 

 

Strengthening Growth Into 2015

The economy grew at a 5.0 percent annual rate in the third quarter, an upgrade from the second estimate of 3.9 percent 

from the Bureau of Economic Analysis, marking the strongest quarterly pace of growth since 2003. The upward revision 

largely came from consumer spending, which grew 3.2 percent—a full percentage point higher than the prior estimate. 
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Consumer spending growth in the current expansion has been 

lackluster when compared to prior cycles. The outlook is looking 

up, however. Real consumer spending growth likely picked up in 

the fourth quarter of 2014 to about 4.0 percent annualized, given 

the robust 0.7 percent gain in real consumer spending in 

November, a solid December auto sales pace, and continued 

declines in gasoline prices. We expect spending growth to pick up 

to 3.1 percent in 2015, which would tie 2010 for the fastest growth 

since 2006. 

Consumers have been wary of taking on additional credit card 

debt for much of the current economic cycle. Last year, we saw the

first sustained acceleration in revolving consumer credit debt 

outstanding since the onset of the crisis. Year-over-year growth 

rose to above 3.0 percent in the second half of 2014 after posting 

approximately 1.0 percent annual gains for much of the prior two years. Revolving credit growth still remains modest by 

historical standards, however, and appeared to have lost some steam late in the year, posting a monthly decline in 

November 2014 for the second time in the last four months.

Continued solid hiring remains the key fundamental supporting spending. The December jobs report provided a strong 

finish to a good year for the 2014 labor market. The job gain of 252,000 was in line with the average monthly gain of 

246,000 jobs for all of 2014, the best year of job growth since 1999. However, other aspects of the report were 

underwhelming. In particular, a decline in average hourly earnings left year-over-year growth at just 1.7 percent, the 

smallest since late 2012. Although the unemployment rate dropped to 5.6 percent, the lowest level since June 2008, it 

was accompanied by a slip in the labor force participation rate to 62.7 percent, which tied for the worst since October 

1977. 

Despite our expectation that consumer spending remained robust through the close of 2014, we estimate that headline 

economic growth slowed in the fourth quarter by about two percentage points (to a still healthy pace of 3.0 percent) from 

the third quarter pace, as some unsustainable forces that drove activity in the third quarter, such as the surge in federal 

defense spending, likely reversed. Manufacturing activity also cooled modestly at the end of the year, according to 

surveys of purchasing managers. The decrease in core capital goods orders in November—the third consecutive monthly 

drop—suggests that business capital expenditures likely posted a decline during the final quarter of 2014 following two 

consecutive quarters of double-digit annualized growth. 

For 2015, we expect that consumer spending will strengthen, partly because of the positive impact of the plunge in 

gasoline prices that temporarily boosts real disposable income. We also expect the ongoing tightening labor market will 

lead to firmer labor income (through both increased hours worked and measured but real gains in wages) amid continued 

rising household net worth. 

Business capital expenditures are likely to grow at a slightly slower clip than last year’s pace, partly because the plunge in 

energy prices are expected to cause U.S. energy companies to curtail their investment this year. In addition, the 

strengthening dollar and slow growth abroad will likely weigh on net exports.

While we expect a faster pace of economic growth this year, our view for the housing market remains cautious, as we 

believe that meaningful income growth needs to occur to spur household formation, which has been frustratingly anemic 

in the current economic expansion. This view is supported by results from our December 2014 National Housing Survey, 

which has generally shown a strengthening of attitudes towards the economy and individual financial situations amid flat 

housing sentiment.

Housing Expected to Contribute More to Growth in 2015

Housing activity in November softened: existing home sales fell sharply to the slowest pace since May, and new home 

sales were down to the weakest pace since July. While multifamily starts rose for the second time in three months, both 

single-family starts and permits fell. Home builders’ confidence edged down in December to end a disappointing year for 

single-family building activity. Housing likely was a meager contributor to growth in 2014, with real residential investment 

spending growing at about half the 6.9 percent 2013 pace. (For more information on multifamily market conditions, read 

the January 2015 Multifamily Market Commentary.)
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The near-term outlook for home sales appears soft. Pending home 

sales—a one-to-two-month leading indicator of existing home 

sales—edged up only slightly in November. Meanwhile, the 

Mortgage Bankers Association’s purchase mortgage application 

index plunged in December to the lowest level since 1995 before 

partially rebounding in early January. Weekly mortgage 

applications tend to be volatile around this time of year, however, 

and it will take some time before we can evaluate the underlying 

trend.

Conditions have been more favorable for home buying at the start 

of 2015. Mortgage rates continued to slide, with the contract 

interest rate for 30-year mortgages sinking 14 basis points to 3.73 

percent during the first week of January, according to Freddie Mac. 

Credit standards continue to loosen up modestly based on both the 

latest Fannie Mae Mortgage Lender Sentiment Survey and the 

Federal Reserve Senior Loan Officer Opinion Survey. We expect first-time home purchases will get a boost from the FHFA’s new 

guidelines in clarifying rules around when a loan can be put back 

to a lender, new GSE initiatives to increase availability of credit to 

borrowers with lower down payments, and the FHA’s plan to 

reduce mortgage insurance premiums for FHA loans by 50 basis

points effective on January 26. 

Having more first-time buyers entering the market is crucial to the 

housing recovery, especially at a time when institutional investor 

buyers have pulled back from the market as foreclosures have 

fallen. Distressed transactions as a share of total sales fell to about 

12 percent in October 2014, marking the 40th consecutive month of 

year-over-year declines, according to data from CoreLogic. As a 

result, most measures of home prices have shown moderating 

year-over-year gains to the mid-single-digit range. 

Declining oil prices may hurt some local housing markets if the 

decline is sustained, particularly in Texas and North Dakota. Texas 

home prices dropped nearly 15 percent between 1986 and 1988

after oil prices fell around 50 percent during the first half of 1986. 

Given expected more favorable fundamentals, the housing market 

should gradually gain momentum in 2015. Weaker or no growth in 

several economies abroad should help keep long-term interest 

rates anchored. Fixed mortgage rates are likely to increase only 

modestly if at all, climbing only slightly above 4.0 percent through 

the end of 2015, which should help to support housing activity. Our 

view for homebuilding activity remains cautious and is based on 

our concern of both supply constraints (including skilled labor) and 

demand constraints associated with still very low levels of 

household formation that will limit the magnitude of growth. We 

expect 2015 total housing starts to increase nearly 20 percent to 

1.16 million units—well below the approximately 1.50 million unit 

pace witnessed on average over the past half-century. Total home 

sales should rise approximately 6.0 percent to 5.66 million units, 

which would be the best showing since 2007, following an 

estimated 3.0 percent decline in 2014—the first annual drop in 

since 2009. 

We upgraded our estimate of total originations in the third quarter 

of 2014 as refinance volume came in by more than we had 
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anticipated, according to data from Fannie Mae acquisitions as well 

as from other data sources we use to benchmark total market 

mortgage originations. We also revised higher our projected 

refinance volume for 2015 as a result of a lower forecast for 

mortgage rates. We estimate that total single-family mortgage 

originations dropped approximately 37 percent in 2014 to $1.17 

trillion. For 2015, we project that total originations will edge up to 

$1.18 trillion, as an increase in purchase originations should 

slightly outweigh a drop in refinance originations. The refinance 

share is projected to slip from an estimated 43 percent in 2014 to 

41 percent in 2015. Total single-family mortgage debt outstanding 

should be relatively flat in 2015 before strengthening gradually 

going forward.

January 12, 2015

Economic and Strategic Research (ESR)

For a more timely snapshot of macroeconomic and housing data, read ESR’s Economic and Housing Weekly Notes.

Sources for chart data: Bureau of Economic Analysis, Energy Information Administration/Chicago Mercantile Exchange, Federal 

Reserve Board, Bureau of Labor Statistics, Census Bureau, National Association of REALTORS®, National Association of Home 

Builders, Mortgage Bankers Association, Federal Housing Finance Agency, Fannie Mae

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic and Strategic Research (ESR) group included in these materials 

should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to 

change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, 

estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is 

accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially 

different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the 

date indicated and do not necessarily represent the views of Fannie Mae or its management.

ESR Macroeconomic Forecast Team

Doug Duncan, SVP and Chief Economist Mark Palim, VP

Orawin T. Velz, Director Brian Hughes-Cromwick, Economist

Richard Koss, Director Hamilton Fout, Director