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62 calculus on how voters interpret the economic impacts of the trade war. e manufacturing sector is impacted the most by the disruption to trade, and many measures suggest it's already in recession. Key manufacturing states, such as Michigan and Pennsylvania, were closely fought battlegrounds in 2016 and are suffering disproportionately from the trade war. at might motivate a resolution with more urgency. For the broader economy, the trade war is resulting in lower business confidence, expressed in slowing capital expenditures and hiring. Business investment is declining, and the labor market is on track for the weakest job growth since 2010. Further deterioration in these measures could spur a resolution to the trade war. A deal on the trade war could help accelerate growth in 2020, particularly if consumers gain more confidence in their job prospects and wages. Higher earnings mean consumers are more likely to spend more, helping boost the economy. In reality, no one really knows with certainty what the outcome of the trade war will be. While significantly lower rates seem unlikely, they cannot be ruled out if the trade war continues. e baseline is for flat to somewhat higher rates. What are the implications for housing? Fundamentally, the medium- and long- term prospects for housing are good because demographics will continue to support demand. Seventy-three million people under the age of 30 are set to enter their peak homebuyer years, but not without challenges. Student debt has been identified by many millennials as delaying or preventing them from pursuing homeownership. Getting married later in life and waiting longer to have children are also factors delaying homebuying. More single homebuyers are becoming more prevalent as lifestyles adjust. Although the homeownership rate is lower today compared to previous generations at a comparable age, the sheer size of the millennial generation bodes well for housing demand. In 2020, with flat to moderately higher rates and a stable non-recessionary economy, the demographic dividend should lead to an increase in the pace of home sales. With home prices still increasing at or above incomes, though, affordability will keep some homebuyers out of the market. FORECASTS » Mortgage rates: Could increase about 50 basis points (bps) in 2019, moving above 4% » Home sales: Should increase marginally by 2% to 5% year-over-year » Home prices: Growth will moderate to about 3% year-over-year » Housing starts: Up 5% year-over-year » GDP: Slows to 2% in 2020, down from 2.2% in 2018 » Unemployment rate: Unchanged at 3.4% by year-end 2020 from 3.4% at the end of 2019 » Fed funds rate: Fed should be on hold as the economy muddles along Mortgage interest rate changes will continue to dominate the housing market in 2020. e 100-plus bps decrease in rates since November 2018 has boosted affordability. It also lifted sales somewhat and accelerated refinancing activity significantly in 2019. » Prediction: Expectations in 2018 for 2019 were that rates would increase, instead they fell over 100 bps. is illustrates the uncertainty of the rate outlook and cautions against placing too much weight on any specific rate expectations. Still, our prediction is that rates are more likely to increase than decrease, given the declines to date and the easing of recession concerns. A trade deal would be a significant boost, so our baseline is a 50-bps increase and mortgage rates could rise above 4%. » Risk: Growth concerns or even a recession could be on the horizon, driven by political risk. An escalation of the trade war and slower global growth could hold push rates lower. Housing sales cooled early in 2019 but recovered late in the year as lower rates boosted demand. In the year ahead, we should see modest gains, especially given how weak sales were early in 2019. » Prediction: Flat to slightly higher rates will support sales. Sustained, though slower, labor market growth and increasing numbers of millennial buyers entering their peak homebuying years will support demand. Expect sales to expand modestly by 2% to 5%. e lingering uncertainty about the economy— stemming in large part from the trade war—could escalate in an election year.

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