Fannie Mae: Housing Expected to Cool Further as Mortgage Rates Move Higher
Economic growth is projected to resume in the second half of 2022, but the combination of high inflation, monetary policy tightening and a slowing housing market is likely to tip the economy into a modest recession in the new year, according to the latest Fannie Mae economic forecast.
Due largely to the higher mortgage rate environment, Fannie Mae lowered its forecast for single-family total home sales in 2022 and 2023 to 5.71 million and 4.98 million, which would represent declines of 17.2% and 12.8%, respectively. While multifamily construction remains strong, Fannie Mae also revised downward its multifamily starts forecast for 2022 to 542,000 units but continues to expect demand for rental units to remain strong because of the single-family market’s relative unaffordability.
“In our view, the recent interest rate surge is due to the market’s recognition of two critical factors: that inflation is indeed not transitory, and that, to tame it, the Federal Reserve will need to be resolute, even at the risk of possible recession,” said Doug Duncan, Fannie Mae’s chief economist. “Inflation’s entrenchment—and the policy action likely required of the Fed—confirms the expectation in our forecast of a moderate recession beginning in the first quarter of 2023. That said, the rise in rates is having the Fed’s desired effect on housing, as house price growth began to slow in June. We expect the slowdown in housing to continue through 2023 as affordability constraints mount for potential homebuyers, and considering, too, that refinance activity has been significantly curtailed by the rise in mortgage rates.”
The Federal Reserve on Sept. 21 raised benchmark interest rates by another three-quarters of a percentage point and indicated it will keep hiking well above the current level. In its quest to bring down inflation running near its highest levels since the early 1980s, the central bank took its federal funds rate up to a range of 3%-3.25%, the highest it has been since early 2008, following the third consecutive 0.75 percentage point move.
Home Sales
Existing home sales fell 5.9% in July to an annualized pace of 4.81 million, in line with our expectations. On an annual basis, sales were down 20.2 percent. With the exception of the initial COVID shutdowns in early 2020 and hurricane-related disruptions in 2015, this was the slowest pace of sales since 2014. Mortgage application data point to further sales declines in the near term, and with mortgage rates rising again, Fannie Mae downwardly revised its existing home sales outlook through 2023. It now projects 2022 total year existing sales to decline 16.5% from 2021, followed by a further decline of 13.3% in 2023. We will release our quarterly forecast update of the Fannie Mae Home Price Index in October.
New home sales and construction continue to come in weaker than anticipated. New home sales fell 12.6% in July and were down 32.3% from a year prior. The temporary pull back in mortgage rates last month may lead to some stabilization in the August new home sales number, but Fannie Mae expects further softening moving forward. At the current sales pace, the months’ supply of new homes on the market was 10.9 in July, up from 9.2 in June. This was the highest level since 2009. To this point, homebuilders do not appear to be offering incentives sufficient to move growing inventories, however, many publicly traded homebuilders continued to report historically elevated gross margins through the second quarter, suggesting room for greater discounting in the future. Homebuilders may have been reluctant to do so until recently as supply chain bottlenecks and labor shortages have resulted in an elevated share of homes for sale still being under construction compared to the historical norm. Currently, comparatively few finished homes are on the market, which may limit the need for builders to price more aggressively. However, over the past couple months, this number has begun to move upward, suggesting homebuilders may soon offer greater price concessions to drive sales.
Multifamily housing construction continues to be strong. However, Fannie Mae revised downward its forecast for multifamily starts in 2023, due to a higher interest rate outlook. Fannie Mae expects activity will slow in 2023 along with a slowing economy, but demand for rental units should remain comparatively strong. As single-family home purchase affordability reaches lows not seen since 2006, many households will likely remain in a rental unit longer than they otherwise would, according to Fannie Mae.
Mortgage Originations
Fannie Mae’s forecast for 2022 purchase volumes remains at $1.7 trillion, essentially unchanged from last month. It’s now expected that purchase volumes will fall about 1.5% in 2023 to just under $1.7 trillion, a downward revision of $17 billion from last month’s forecast.
In the refinance market, higher mortgage rates have significantly lowered the expected market size for 2022 and beyond. Fannie Mae projects 2022 volumes to total $731 billion, $38 billion lower than last month’s forecast. Fannie Mae expects refinance volume to decrease further in 2023 to reach $490 billion, down $102 billion from last month’s forecast.
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