Cloudy Prospects for Multifamily Amid Economic Comeback

Fannie Mae forecasts that GDP will grow by an annualized rate of 27.2 percent in the third quarter, but state and local budgets are a concern.
Image courtesy of Greg Isaacson

The U.S. economy is expected to stage a comeback in the third quarter, bolstering a strong residential market, according to new research by Fannie Mae’s Economic & Strategic Research (ESR) Group—but job losses and budget cuts on the state and local level could weigh on multifamily development.

The group now forecasts that domestic GDP will grow by an annualized rate of 27.2 percent during the quarter as the economy continues to reopen. Factoring in the historic decline of the second quarter, GDP is projected to grow by 3.1 percent in 2020. Fannie Mae previously projected a steeper full-year decline of 4.2 percent but has revised its forecast based on encouraging recent data, including falling new COVID-19 cases, an elevated savings rate in June and increased mobility and credit card expenditures.


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The overall housing sector is powering through the downturn, driven by strong market fundamentals as well as the federal government’s aggressive measures to bail out the economy, and Fannie Mae has an improved outlook for home sales and mortgage originations. Total origination volume is now projected to reach $3.4 trillion in 2020, the highest annual figure since 2003, and home purchase volumes totaling $1.3 trillion this year.

Despite the continued strength of the housing sector, huge uncertainties remain for the apartment industry. Multifamily starts jumped 17.5 percent in June, but Fannie Mae attributes this increase to projects that were already deep into the planning stages. The government-sponsored enterprise expects construction starts to be relatively weak in the coming quarters compared to single-family starts.

Budgets in peril

Moreover, many state and local governments face a budget crisis that could curb construction of affordable housing. The economic turmoil induced by the pandemic forced states to spend more on unemployment insurance and public healthcare for newly jobless residents even as tax revenue dried up. Most states are required by law to balance their budgets, while many municipalities seek to trim spending as well.

This could be done in a variety of ways, but certain State and City Housing Trust Funds (HTFs), which rely on government funding to provide more than $2.5 billion each year to advance affordable housing, are at risk of having funds diverted to non-housing uses. HTFs that rely on annual appropriations from their state’s general fund are most vulnerable to having funds channeled away from housing, which may include those in Georgia, Kansas, Michigan, New Hampshire, New Mexico, New York, Texas, Utah and Virginia, according to Fannie Mae.

On the other hand, HTFs with at least one dedicated source of funding such as real estate transfer taxes are more insulated from state budget crises. But economic contraction is likely to reduce the number of residential and commercial real estate deals, reducing revenue from taxes and fees and therefore squeezing funding for HTFs.

Home sales bounce back

Pent-up demand helped boost existing single-family home sales by 20.7 percent in June to 4.72 million annualized units, suggesting sales could rise in July to a level unseen since 2006. Because of tight inventory, this elevated pace of sales is unlikely to last, Fannie Mae commented. New home sales rose 13.8 percent in June to the highest level since 2007, while single-family housing starts increased 17.2 percent, still a significantly weaker pace than before the pandemic.

Fannie Mae estimates that real GDP shrank 32.9 percent on an annualized basis in the second quarter, slightly less than its previous forecast but still the deepest decline since at least 1947, when the quarterly data series begins. The forecast was revised in part because of reimbursed origination fees related to Paycheck Protection Program (PPP), which provided an unexpected boost in federal expenditures.