How CA and NV Fit into Fannie Mae’s Housing Forecast

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Fannie Mae said this week the U.S. housing market will add to economic growth for the foreseeable future, as long as some expectations are met. Home prices should barely grow, mortgage rates could continue falling even lower, and builders are poised to “pay more attention” to entry-level product.

So what does it mean for California and Nevada? Some local context helps illuminate what's going on.

In the Golden State, the median home price forecast has been consistently downgraded for the 2019 – 2020 outlook period during the past eight months according to Robert Eyler, economist for Sonoma State University and board member of Redwood CU. Yet for Nevada it’s remained at a solid 3 – 4 percent, essentially unchanged.

The two states’ housing markets and economies don’t provide an apples-to-apples comparison but are still worth contrasting.

“The last five to six years is giving way to a move downward in lower-priced homes, and that drags the overall California median price down a bit,” Eyler said. “Demand is frothy, and as units continue to slowly come onto the market, general housing demand should outpace new supply enough to keep prices stable or maybe rising slowly in select places across California.”

As the Bay Area, greater Los Angeles, and San Diego regions experience lower median prices over the next 12 months, certain inland areas such as Butte County, Bakersfield and other Central Valley regions will see rising median values, Eyler said.

In the Silver State, the Las Vegas area will likely appreciate slower than the Reno-Sparks region due to the northern locality’s economic and workforce development activities. Nevada’s quarterly economic growth and job market is on track to continue outpacing California from 2019 – 2020 just as it has recently.

Fannie Mae’s announcement came from the U.S. government-owned mortgage enterprise’s monthly housing market and economic update. Nationally, home prices are only expected to rise 1 percent in 2019, which means some areas will either be flat or see declines—an inflection point compared to the past couple of years.

Eyler said the average rate on a 30-year fixed mortgage (recently falling to the 3.8 – 3.9 percent range) could fall even lower given the right environment. If the Federal Reserve lowers its “federal funds” bank-to-bank interest rate to hedge against a slowing economy, bond holders in the financial markets may anticipate rising consumer inflation and demand more yield from U.S. 10-year treasury notes. And if other investors see yields rise, they may pile into 10-year treasuries.

Eventually, higher demand for treasuries would force their yields even lower, making 30-year mortgage bond yields also drop and cause homebuyer interest rates to fall. “That’s the key, is where the 10-year ends up,” Eyler said.

The Economic and Strategic Research Group at Fannie Mae is expecting the housing market to “provide an economic cushion” to the anticipated economic and labor market slowdown as mortgage rates stay relatively low and “for sale” home inventory rises during the next 12 months.

Nonetheless, Fannie Mae’s economic forecast for 2019 and 2020 was downgraded due to potential lower business confidence, activity, and a pullback in consumer spending—caused by “the ratcheting up of international trade tensions, including tariffs applied by the U.S. and China, as well as the threat to impose tariffs on Mexico.” The organization now expects U.S. economic growth (Gross Domestic Product—or GDP) to come in at 2.1 percent and 1.5 percent for those two years (previously 2.3 and 1.8 percent).

Stay tuned during 2019 for upcoming quarterly update webinars on the economy presented by Dr. Robert Eyler, as well as a special “Your Economy—Your Credit Union” update during REACH 2019! You can also visit our Your Economy—Your Credit Union webpage for the latest forecast report for your local region in California and Nevada.

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