WASHINGTON, DC-Fannie Mae chief economist Doug Duncan has reason to smile. His reading of the tea leaves indicates an improving economy through the end of the year.

Fannie's most recent research reveals this optimism, but how does that jibe with reports that the unwinding of quantitative easing in the fall will hike interest rates and dampen commercial real estate activity generally?

In the report, Duncan predicts the economy will grow at roughly 2% this year. And late-year momentum should put growth at 2.6% in 2013, “the strongest since 2005.”

In an interview with GlobeSt.com, Duncan revealed that the 2% prediction has already taken into account what might happen in the fall. “At the beginning of the year we were looking at a predicted 2.3% growth,” he said. “There's a sense among the public that home prices will fall, but there's no evidence of that.”

Fannie's expectation is that the rate of growth will slow a bit, “but don't expect prices to fall,” he says. “We don't expect anything to occur outside of our forecast.”

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And that forecast is one of steady, albeit slow, recovery. Duncan is basing his view on two essential drivers: Consumer confidence and jobs. “The latest jobs report showed steady year-to-date job creation,” he says, “and measures of consumer confidence are at or near recovery highs.” The economist expects to see an increase in consumer spending before the end of the year.

Prime proof of consumers' reinvigorated confidence is that home sales “have kept up,” even in the face of “a sharp increase in mortgage rates during the past two months.” Home prices too have grown in that time. Rates will continue their climb, says Duncan, “averaging 4.7% in the fourth quarter of this year, about 40 basis points higher than the June forecast. But that won't impact the outlook for sales, which he says is expected to increase 8% in 2013.

“However, while the surge in mortgage rates has not significantly hurt mortgage applications,” he adds, “it has led to a marked decline in refinancing applications, which is expected to continue next year.”