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8 FANNIE MAE: LESS AFFORDABILITY AMID STEADY GROWTH IN 2016 Following up the exuberant growth of 2015's housing market would be a tough act if anyone expected it could be followed. Most forecasts for 2016 came to the same conclusions as those of the National Association of Realtors—optimistic about steady growth, but tempered with an understanding that growth will be more modest this year. As Fannie Mae sees it, the year ahead will be less like a person in love and more like one in a satisfying long-term relationship. Growth in the U.S. housing market will continue for its seventh straight year, but there will be bills to pay. In the housing market's case, those bills will come in the form of affordability, which Fannie Mae says will shrink, especially in the lower-end of the market, where strong home price gains still outpace household income growth. Fannie Mae's Economic & Strategic Research (ESR) Group expects consumer spending to underpin economic growth this year, as it did in 2015, and for residential investment and government spending to help drive growth, despite some drag from net exports. Overall, the ESR Group expects the economy to grow 2.2 percent and the pace of improvement in total home sales should be about 4 percent in 2016. "We ended 2015 with a positive jobs report, an annual record high for auto sales, and the housing market poised to be the strongest since 2007," said Doug Duncan, Fannie Mae's chief economist. However, he said, "despite our expectation of only a small rise in mortgage rates, home price and income dynamics should inhibit home purchase affordability." Overall, the housing market and its place in the economy will not be without its obstacles. Duncan cited China's deteriorating economic activity, a stronger dollar, geopolitical turmoil, and uncertainty about monetary policy as lingering risks to the rosy outlook for the year ahead. Ed Delgado, president and CEO of the Five Star Institute in Dallas, cautioned against oversimplifying the economic picture, particularly in light of mounting debts and tighter job markets among younger adults. "e housing sector of the economy, in particular, needs to be re-evaluated," Delgado said. "Although the housing market made strides this past year, the homeownership rate now stands at the lowest level in 48 years. Millennials are saddled with $1.3 trillion in student loan debt, and job prospects for recent grads are bleak. As such, President Obama's efforts on the housing front cannot be counted as a victory. ere now exists barriers of entry for homeownership among first-time homebuyers, millennials, and minorities." In light of the Fed's first rate hike since 2006—which Fannie Mae expects to see hit 4.2 percent by year's end—Duncan said that single-family starts should accelerate to 17 percent this year. But only, he said, "if easing housing-supply shortages and a continued strong pace of household formation pan out." SERIOUS DELINQUENCY NUMBERS CONTINUE SHRINKING Fewer and fewer residential mortgage loans are seriously delinquent (90 or more days past due) as the crisis passes its seven-year anniversary, according to several different measures recently released. In some cases, the number of seriously delinquent loans is at or below pre-crisis levels. In its most recent National Foreclosure Report, CoreLogic reported a serious delinquency rate of about 3.3 percent as of the end of November 2015, which computes to about 1.25 million homes—the lowest level since December 2007 before the crisis. "Tight post-crash underwriting standards coupled with much improved economic and housing market fundamentals have combined to push new mortgage delinquencies to 15-year- lows," said Anand Nallathambi, president and CEO of CoreLogic. "Although judicial states will likely continue to lag, given current trends, it is reasonable to expect a continued and significant drop in the rate of serious delinquencies and foreclosure starts in 2016." According to CoreLogic, non-judicial foreclosure states continued to have much lower serious delinquency rates than judicial foreclosure states in November. Only six non-judicial states had serious delinquency rates higher than the national average of 3.3 percent for the month, while only five judicial states had serious delinquency rates below the national average for November. e state with the highest serious delinquency rate was still New Jersey at 7.8 percent, followed by New York at 6.4 percent and Florida with 5.4 percent. In its November 2015 Mortgage Monitor, Black Knight Financial Services reported a 26 percent drop year-over-year in 90-plus day delinquent inventory, down to about 827,000 properties. e number of 90-plus day delinquencies was still way down year-over-year despite a seasonal uptick in November. e FHFA, Freddie Mac's conservator, reported in its Foreclosure Prevention Report for October 2015 released earlier this week that the serious delinquency rate on residential mortgage loans backed by Fannie Mae and Freddie Mac dropped from 1.52 percent to 1.50 percent. e GSEs are completing fewer loan modifications. However; through the first 11 months of 2015, Fannie Mae averaged slightly less than 8,000 loan mods per month compared to more than 10,000 monthly for all of 2014. e share of 60-day delinquencies for the GSEs was at 1.9 percent in October, down from its peak of 5.9 percent in 2011. "We ended 2015 with a positive jobs report, an annual record high for auto sales, and the housing market poised to be the strongest since 2007." –Doug Duncan, Chief Economist, Fannie Mae

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