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FM Commentary

Sustained Consumer Pessimism Hinders Housing Recovery

Doug DuncanThe latest data from Fannie Mae’s National Housing Survey shows that consumer sentiment is holding steady at depressed levels, discouraging spending on big-ticket items such as housing. This is a cause for concern not only for the development of the housing market, but also for the economy as a whole, as there will be no meaningful economic recovery without a housing recovery.

The October survey showed that consumers’ outlook for the housing market has remained downbeat. On average, consumers expressed continued pessimism with regard to home prices (with their expectation averaging out to an expected further decline of 0.3 percent over the next year). This extends the streak of negative outlooks to five consecutive months.

More positive economic headlines during the past month failed to lift consumers' moods, as an all-time high of 46 percent of consumers expect their personal financial situation to stay the same during the next 12 months. Seventy-seven percent of survey respondents believe the economy is on the wrong track, consistent with the previous two months. This percentage is even higher among respondents who know someone who has defaulted on their mortgage: as of the third quarter of 2011, 80 percent of homeowners and 74 percent of renters who know defaulters believe the economy is on the wrong track, compared to 75 percent of homeowners and 70 percent of renters who do not know defaulters. While consumer views regarding their personal finances and the direction of the economy have not deteriorated further, it is discouraging to see the lack of appreciable improvement after overall sentiment took a hit during the debt ceiling debate in August.

Direction of Economy Poll: Right vs. Wrong Track

However, survey results also show a sustained preference for homeownership among consumers. The share of respondents who say they would buy rather than rent if they were going to move is 66 percent as of October and has been increasing steadily since July. Sixty-six percent view housing as a safe investment and 86 percent prefer homeownership to renting. While many consumers aspire to own, they may not have the capacity to do so immediately. Fifty-six percent of consumers believe it would be difficult for them to get a mortgage today, and as of Q3, respondents indicate that the top obstacles continue to be their income and ability to make a sufficient down payment, with their credit history in a close third. Many who would prefer to own still need time to shore up their personal finances to ensure that they can achieve and maintain homeownership in the future.

At the macro level, we see that economic activity picked up in the third quarter, thanks to a sizable rebound in consumer spending on services. However, the hike appears to have come out of consumers' savings, as disposable income fell during the quarter. While consumers’ concerns about their finances and dissatisfaction about the direction of the economy remain elevated, increases in consumer spending are unlikely to spill over into housing and support a recovery.

Doug Duncan
Vice President and Chief Economist

November 18, 2011

This commentary contains a number of opinions, analyses, estimates, forecasts, expectations, and other forward-looking statements, which are based on the writer’s current assumptions regarding numerous factors and are subject to change. These forward-looking statements should not be construed as indicating Fannie Mae’s business prospects or expected results. Actual outcomes may differ materially from those reflected in these forward-looking statements due to a variety of factors, including, but not limited to, those described in “Risk Factors” in our quarterly report on Form 10-Q for the quarter ended September 30, 2011 and our annual report on Form 10-K for the year ended December 31, 2010.

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