The response by consumers and policymakers to rising COVID-19 case counts is likely to determine whether currently projected improvements to U.S. economic growth materialize, according to the latest commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. While the ESR group expects the virus' resurgence to drag on consumer spending in coming months, absent spring-like behavioral shifts and lockdown measures, it expects that the further recovery of the domestic labor market and built-up household savings will likely be sufficient to drive continued real GDP growth, which is now forecast at 3.3 percent for full-year 2021, slightly below last month's projection, and 3.0 percent for full-year 2022. Nearer-term projections, including the fourth quarter of 2020 and the first quarter of 2021, were revised modestly downward due in part to recent signs of modest, virus-related changes in consumer behavior. Although strict new lockdown or social distancing mandates remain the largest downside risk, the ESR Group notes that economic growth in coming quarters could substantially surpass the baseline forecast if, alternatively, such measures can be avoided and the development of a vaccine progresses swiftly.

After a sharp rebound in the third quarter, housing is expected to demonstrate continued strength through the rest of 2020 and into the new year. For the fourth quarter of 2020 and the first quarter of 2021, the ESR Group has upgraded its new and existing home sales forecasts – due to stronger-than-expected sales to date – as well as its mortgage origination forecasts for full-year 2020 and 2021. However, the ESR Group noted that the home sales pace may have peaked in September and expects a moderate slowdown to be underway. Pending sales and purchase mortgage applications have recently pulled back from highs as pent-up homebuyer demand from the spring continues to recede. A renewal of infection avoidance behavior among prospective homebuyers and home sellers could also adversely impact the forecast.

"The continued geographic shift and now resurgence of COVID-19 has raised risks to the pace of growth, though in our view not to the level of a potential second recessionary downturn," said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. "Households appear reasonably well-positioned to weather and cushion the slowdown, but if a strict broad-based lockdown were to be instituted and sustained, then the economy could turn down again. Meanwhile, the housing market continues to thrive in the low rate environment, particularly refinancing, but the sector is showing some early signs of slowing on the purchase side as the delayed seasonal effect works its way through the market."

Visit the Economic & Strategic Research site at fanniemae.com to read the full November 2020 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae's Economic & Strategic Research Group, please click here.