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2016: Affordability Constrains as the Expansion Matures

In our inaugural Economic Developments commentary for 2016, we 

present a preview of the key theme that will shape our outlook for 

the U.S. economy and housing and mortgage markets over the 

coming year. As the expansion progresses through its seventh

year—the fourth longest since World War II—we believe the housing 

recovery will march on as several factors affecting the ability of 

households to purchase a home continue to improve. We expect 

that further labor market tightening will lead to a pickup in 

compensation and increased job security. In addition, the fourth 

quarter 2015 Mortgage Lender Sentiment SurveyTM shows that 

lenders expect to continue to ease lending standards and expand 

consumers’ access to mortgage credit this year. Despite these 

positives, several opposing factors point to constrained housing 

affordability, particularly for first-time homebuyers. These factors 

include continued strong home price appreciation that outpaces 

income growth, as well as rising mortgage rates. Measures 

previously available to homebuyers to mitigate the impact of rising 

interest rates and strong home price gains, such as certain types of 

adjustable-rate mortgages, are no longer broadly available. In 

addition to higher interest rates and home prices, elevated rental 

cost burdens will continue to hurt purchase affordability by 

inhibiting renters’ abilities to save for down payments. 

Because of these affordability challenges, we believe that the 

home sales market will continue to recover along with the broader 

economy in 2016, but that the pace of improvement will moderate.

By contrast, housing starts should increase this year from the 

disappointing pace last year, which was partly due to supply 

constraints. While we expect consumer spending to continue to 

underpin economic expansion this year, residential investment and 

government spending should also help drive growth against a 

continued drag from net exports. Low energy prices are expected 

to weigh further on nonresidential investment in structures, and 

business capital investment growth should remain moderate, 

weighed down by equipment investment in energy and farm 

sectors. Meanwhile, the worst of the inventory correction appears

to have happened during the second half of 2015, bringing 

inventory investment back to more normal rates. Overall, we 

expect economic growth to accelerate slightly to 2.2 percent this 

year from an estimated 2.0 percent in 2015. Further deteriorating 

economic and financial activity in China, a stronger U.S. dollar, 

geopolitical turmoil, and monetary policy uncertainty present 

downside risks to the forecast.

Economy Drags Housing Upward

Our theme last year posited that the stronger economic backdrop, 

including improving private domestic demand and hiring, would

lead to better income prospects, underpinning a higher rate of 

household formation and broad-based improvement in housing 

activity following an uneven recovery in 2014. This pattern of the 

housing market lagging behind progress in the overall economy 

contrasts with the typical post-war economic recovery, in which 

housing has led the expansion.

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'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

ARM Share of Loan Applications (%)

FRM 30-Year: Contract Interest Rate (%)

Adjustable-Rate Mortgage Usage Is Now 

Limited Even When Mortgage Rates Spike

Fixed Mortgage Rate

ARMs Share (Right Axis)

Taper Tantrum

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

Jan-14

Mar-14

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Sep-14

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Jan-15

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Real Personal Income 

(SAAR,Year-over-Year % Change)

Real Income Growth Accelerates

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1.0%

1.5%

2.0%

2.5%

Jan-14

Apr-14

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Jan-15

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Oct-15

Avg Hourly Earnings: Private Employees 

(SA, 1982-84$/Hour, Y-o-Year % Change)

Real Wages Pick Up
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As it turned out, we were wrong in our economic growth projection. Instead of strengthening, real gross domestic product 

(GDP) growth is poised to come in about 0.5 percentage points weaker than the 2.5 percent rate in 2014. Despite 

lackluster output, job creation was strong. The diverging GDP and job numbers imply continued feeble productivity

growth. For the housing market, employment and income trends have more weight than GDP. By the end of 2015, the 

unemployment rate declined five percentage points from its cyclical peak. Reduced labor market slack helped push wages 

and personal income higher. Combined with low inflation, real average hourly earnings and real personal income picked 

up in 2015 from 2014, though the trend weakened toward the end of the year. Stronger income growth over the past year 

helped boost household formation and housing demand. When all of the 2015 housing data come in later this month, we 

expect to see the best housing market since 2007, as we had projected at the start of the year.

Second Half Growth Disappoints

The final estimate of third quarter economic growth came in at 2.0 percent annualized following a robust 3.9 percent rate 

in the prior quarter. The unwinding of an unsustainable pace of inventory investment during the first half of the year was 

the biggest drag on GDP. However, real inventory investment remained elevated in the third quarter, and recent data 

suggest that the painful but necessary inventory correction continued late last year, thereby also suppressing GDP growth 

in the final quarter of 2015. The strong dollar and soft overseas growth also weighed on net exports. However, domestic 

consumer and business demand, as measured by real final sales to private domestic purchasers, grew a solid 3.2 percent 

annualized in the third quarter.

Incoming data point to anemic headline and underlying 

economic growth for the fourth quarter, with consumer spending 

the biggest source of disappointment. So far, consumers have 

saved rather than spent the windfall from the decline in gasoline 

prices. Oil prices tumbled further in early January, with West 

Texas Intermediate oil declining to around $31 per barrel at the 

time of this writing. While this presents good news for 

consumers, it presages more pain for the energy sector. Real 

consumer spending rebounded 0.3 percent in November 

following a flat reading in October. Spending likely ended 2015 

on a weaker note, as chain store sales data for the holiday 

shopping season fell short of retailers’ expectations, and auto 

sales declined 4.7 percent in December, the biggest drop in 

2015 following three consecutive strong monthly gains. Despite 

the decline in December, auto sales posted a record high 

average pace of 17.4 million in 2015, thanks to easy access to 

credit and low gasoline prices. We estimate that real consumer 

spending came in at 2.2 percent annualized in the fourth quarter, 

at odds with declining gasoline prices and strong labor market 

conditions during the quarter. On the plus side, the buildup in 

savings late last year should help support spending in the near 

term.

The December jobs report provided a much-needed strong finish

for 2015. With nonfarm payrolls rising 292,000 in December and

positive revisions to prior months, the three-month average 

monthly gain of 284,000 marks the strongest pace of job growth 

since January 2015. Notably, construction payrolls rose 45,000 

following a 48,000 gain in November. The 1.4 percent jump in 

construction employment between October and December was

the second biggest two-month gain in the past decade. 

However, the strong increase was partly due to unseasonably 

warm weather, which delayed construction layoffs that typically occur in the winter months and boosted the seasonally 

adjusted employment figure. The payback may come this month as the weather has returned to more normal winter

patterns.

The one weak link in the December jobs report was the absence of a monthly increase in average hourly earnings (not 

adjusted for inflation); however, the year-over-year gain of 2.5 percent was at the upper end of the range witnessed during 

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Total Light Vehicle Retail Sales 

(Annual Average, SAAR, Mil. Units)

2015 Marks Best Year Ever for Auto Sales

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Change in Total Nonfarm Employment

(SA, Thousands, 3-Month MA )

3-Month Average Job Gains End the Year with 

the Best Showing Since January
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the recovery, and, as noted previously, real earnings growth was relatively strong during 2015. The December 

unemployment rate was unchanged at 5.0 percent, but the lack of improvement was for the right reason as the labor force 

participation rate ticked up to 62.6 percent. However, the participation rate is little changed from a year ago and remains

well below the rate of 65.7 percent registered at the start of the expansion. The employment-to-population ratio edged up 

to 59.5 percent in December, an expansion high but still well below the rate prior to the recession.

The upbeat December jobs report should allay worries generated by other incoming data, which have been weak and 

have sparked concerns that the troubles in China and other emerging markets could derail the U.S. economic expansion.

Both the Dow Jones Industrial Average and the S&P 500 plunged more than 6 percent during the first week of 2016, each 

marking the worst first five-day start of any year. Manufacturing data continued to show malaise for the sector. Factory 

orders fell in November for the third time in four months. Core capital goods orders—non-defense capital goods excluding 

aircraft—also fell during the month following a slight gain in October, suggesting business capital investment growth will 

weaken in the current quarter. 

A near-term turnaround in manufacturing appears unlikely. The Institute for Supply Management (ISM) indicated that the 

manufacturing sector contracted in December for the second consecutive month. The last time this occurred was when 

the economy was emerging from the recession in 2009. The ISM survey for the service sector showed that activity 

continued to expand outside of manufacturing, albeit at a slower pace. The strong dollar and weak global growth reduced

exports of goods and services in November by more than 7 percent compared with a year ago, the worst performance 

since 2009. Imports also fell over the past year but at a more moderate rate of about 5 percent. We expect net exports to 

remain a drag on growth in 2016, but that the impact will be smaller than in 2015. 

Housing Roundup

Home building activity picked up in November, as both single-family and multifamily starts surged. However, construction 

spending only posted a modest rise during the month, with single-family construction outlays edging up and multifamily 

construction spending declining. Meanwhile, existing home sales posted a double-digit drop in November, falling to the 

lowest level since April 2014. The new TILA-RESPA Integrated Disclosure (TRID) rule, which requires lenders to give 

buyers more time to review loan documents, may have delayed closings that otherwise would have occurred in 

November. If this is the case, we should see a sizable rebound in December.

New home sales increased in November but on the heels of substantial downward revisions, putting the three-month 

moving average well below the recent peak of earlier this year. The poor performance of November residential 

construction spending, combined with weak broker commissions implied by home sales, suggests much lower residential 

investment growth than we had expected in the prior forecast. Leading indicators of home sales were mixed: The pending 

home sales index fell in November for the third time over the last four months, while purchase mortgage applications

rebounded in November and rose further in December.

At its December meeting, the Federal Open Market Committee (FOMC) raised the fed funds target rate 25 basis points, 

the first rate hike since 2006. So far, this first move has had a minimal impact on mortgage rates. In our view, the FOMC’s 

dovish statement and minutes confirmed our expectations of a gradual pace of monetary policy normalization. We expect 

three fed funds rate hikes in 2016, one more than the fed funds futures market implies, but one less than the number 

indicated by the median projection of the FOMC members. Given the strong December jobs report but muted inflationary 

pressures and a strong dollar, the next rate hike will likely occur in March 2016. Based on current Fed guidance, we 

expect the reinvestment of the Fed’s securities portfolio to continue for at least another year. 

Because of the expected slow pace of U.S. monetary policy normalization and continued easing by major central banks 

around the globe, we project that the 30-year fixed mortgage rate will rise from 3.90 percent in the fourth quarter of 2015 

to just 4.15 percent in the final quarter of 2016. While our base forecast points to a gradual rise in mortgage rates, a rate 

spike remains one of the downside risks for the housing market this year.

Home price appreciation remains strong. For example, the Case-Shiller national house price index rose 5.2 percent in 

October from a year ago, the biggest gain since July 2014. The CoreLogic national index advanced 6.3 percent in 

November from last year, also the biggest rise since July 2014. In addition to the overall indices, CoreLogic provides 

trends of four individual home-price tiers calculated relative to the median national home price. The low-price tier has 

appreciated most rapidly in recent months, increasing 8.2 percent year over year in November. Of the four segments, this 

low-price tier is the only one with prices surpassing their pre-bubble peak. Given that most potential first-time homebuyers 

will focus more on this segment of the market, where price gains continue to be robust and inventory is extremely lean, 
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they will likely encounter more difficulty in finding a home they can afford even if mortgage rates edge up only gradually 

this year as we expect.

Potential First-Time Homebuyers Are Facing Mounting Challenges

From Robust Home Price Appreciation amid Tight Inventories for Starter Homes

 

Although mortgage rates are expected to rise only slightly this year, we believe the home sales market will face a 

challenge of deteriorating housing affordability, driven by continued strong home price appreciation that outpaces 

household income growth, especially for potential first-time homebuyers. Furthermore, while lending standards have 

eased, they remain tight relative to the pre-bubble period. Thus, we expect growth in total home sales to moderate this 

year to about 4.0 percent, compared with an estimated gain of 6.0

percent in 2015. Multifamily housing starts have been very robust 

throughout the expansion, so we expect only a small gain this year 

from already elevated levels. (For more information on rental market 

conditions, read the January 2016 Multifamily Market Commentary).

Single-family starts appear to have posted a sizable gain of 

approximately 9.0 percent in 2015, but the increase was from 

depressed levels. We expect single-family starts to rise about 17 

percent this year, if our expectations of easing supply shortages 

(e.g., skilled labor, available lots) amid continued rising household 

formation come to fruition. Nonetheless, inventory should still remain 

historically lean, allowing another year of solid home price 

appreciation at the national level. However, price increases will vary 

significantly across regions, with moderating gains expected in some 

oil-producing states. 

We revised lower our estimates of both purchase and refinance mortgage originations in the fourth quarter of 2015 to 

reflect lower home sales and refinance volume than anticipated. Following an estimated 29 percent rise in 2015, we 

expect total single-family mortgage originations to drop about 17 percent this year to $1.4 trillion. As a result of the rising 

rate environment, the mortgage market is expected to tilt further toward purchase loans going forward. We expect the 

refinance share of originations to trend down from 46 percent in 2015 to 32 percent in 2016. 

January 11, 2016

Economic & Strategic Research (ESR) Group

For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR’s Economic and 

Housing Weekly Notes.

Sources for chart data: Mortgage Bankers Association, Bureau of Economic Analysis, Bureau of Labor Statistics, Autodata, CoreLogic, Census

Bureau, National Association of REALTORS®, Fannie Mae ESR Forecast

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & 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 

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'06 '07 '08 '09 '10 '11 '12 '13 '14 '15

CoreLogic National Home Price Index

(Jan '00=100, Year-over-Year Change, %)

Home Price Growth

Tier 1

Tier 2

Tier 3

Tier 4

National HPI

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Existing Home Inventory by Price Tier

(Year-over-Year Change, %)

Existing Home Inventory Growth

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Tier 2

Tier 3

Tier 4

Note: Tier 1: 0-75% of median, Tier 2: 75%-100% of median,

Tier 3: 100%-125% of median, Tier 4: 125%+ of median

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Multifamily

Starts

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New Home

Sales

Period-over-Period Change, %

Outside of Single-Family Starts, Housing 

Activity Gains Should Moderate

2014

2015 YTD (Nov)

2016 Forecast

2016 Forecast Thous.

Single-Family Starts 827

Multifamily Starts 405

Existing Home Sales 5,354

New Home Sales 555
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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 Frank Shaw, Analyst

Hamilton Fout, Director