Fiscal drags such as the sequester may have weakened economic momentum, but the economy should “reaccelerate” in the second half of this year as financial and housing conditions improve, according to Fannie Mae’s Economic and Strategic Research Group.

In its most recent economic outlook, the group revealed expectations for the economy to continue the modest recovery and grow 2.2 percent this year, up from 1.7 percent in 2012 and 2 percent in 2011.

“Employment numbers are getting better, albeit it at a relatively slow pace, and the April employment picture should help boost consumer sentiment toward the economy overall. Spending grew in the first quarter at a surprisingly strong pace, and although this rate is unlikely to hold up, consumers continue to show signs of resilience in the face of fiscal concerns,” said Doug Duncan, chief economist for Fannie Mae.

Duncan though warned of “potential” headwinds, such as the “long-term effects of sequestration, spending constraints, the sovereign debt crisis, and the impending debt ceiling.”

Amid the expected improvements, the group anticipates the housing market’s recovery will go on as well, reinforced by current levels of home affordability.

According to the GSE’s analysis, housing affordability should steadily decline from its 2012 peak, but will still hover above normal levels through 2017. By that time, the group expects the 30-year fixed rate mortgage to average 5 percent.

While affordability provides support to the housing market’s recovery, it’s not the main driver of homebuying activity, according to the GSE.

“Going forward, the trends in lending standards, regulations regarding lending and securitization of mortgages, and housing finance reform will be key to a transition to normal for the housing market,” the group stated.

Home prices should also continue their upward trajectory, aided by limited inventory, a smaller share of distressed sales, and increased efforts to prevent foreclosures.

Looking ahead, the group forecasts single-family starts will increase 24 percent this year, while multifamily starts will rise by about 35 percent during the same time period.

Total home sales—new and existing—are expected to increase by nearly 8 percent in 2013, while home prices should average a 3.9 percent gain.
The 30-year fixed rate mortgage is projected to average 4 percent in 2014.