Home sales

As inflation rises, home sales are expected to decline over the next 2 years


Inflation is heating up and could accelerate further, but the impact on mortgage rates is expected to be modest thanks to the Federal Reserve’s clear roadmap on its plans to withdraw support from mortgage markets in the coming months.

That’s according to the latest economic and real estate forecast from economists at mortgage giant Fannie Mae, who nonetheless see home sales drop over the next two years and mortgage refinances plummet as interest rates rise.

This is the first time that Fannie Mae has provided forecasts until 2023, when they expect the economy to have entered the “mature state of the business cycle”, with the risk of a new one. recession.

Gradual increase in mortgage rates expected

Fannie Mae economists predict that 30-year mortgage rates will rise only modestly over the next two years, reaching 3.4% by the end of 2022, then stabilizing at 3.5% over the course of the last nine months of 2023.

Even though the Fed started cutting its $ 120 billion in monthly treasury bill and mortgage-backed securities purchases that helped keep rates at historically low levels during the pandemic, it gave investors many warnings.

“The Fed was careful to publicize its plans to cut and hike rates to avoid a repeat of the tantrum of 2013, when market expectations suddenly shifted regarding the long-term real rate, and for now. both financial market metrics and long-term surveys. Inflation expectations remain mostly anchored, “Fannie Mae forecasters said.” Therefore, our baseline forecast is that these effects are largely ” anchored, “causing only a slight upward drift in mortgage rates over the next few years.”

If it starts to look like inflation is more than transient, then mortgage rates could rise “decisively,” according to the report. That’s the view of economists at the Mortgage Bankers Association, who predict that 30-year mortgage rates will rise to 4.3% by the second half of 2023. Freddie Mac and National economists Association of Realtors are in the middle, forecasting that mortgage rates will average 3.7% during the fourth quarter of 2022.

By gradually reducing its asset purchases – by $ 10 billion per month for Treasury securities and $ 5 billion for mortgage-backed securities – the Fed is on track to complete its reduction by June. At this point, it is likely to start raising the short-term fed funds rate if inflation is still on the rise.

Doug Duncan

The Fed has left “some leeway for policy change by committing to the speed of asset reduction for just two months, with adjustments that can be made afterwards,” Fannie chief economist said Mae, Doug Duncan, in a statement. Investors who buy mortgage bonds “will have one eye on the monthly inflation releases and the other on the Fed in the months to come. How credible investors, business leaders and consumers will find the key to changing Federal Reserve beliefs about the transient or sustained level of inflation and the resulting monetary policy actions – their choices will have an impact. impact on economic growth as well as on real estate and mortgage activity.

Fannie Mae forecasters noted that inflation in October, as measured by the Consumer Price Index, was higher than expected: 0.9% month-over-month and 6.2% on an annual basis.

“However, it’s the underlying details that are more worrying,” the forecast said. “Unlike similarly large surges last spring which could be attributed mainly to problems in the auto industry and reopening of sectors, this report showed large-scale price growth.”

It takes about 15 months for the rise in house prices and rents to appear in the consumer price index. The continued strength in home price appreciation and rents could add a percentage point to the consumer price index next year. Fannie Mae economists say they wouldn’t be surprised to see the index surpass 7 or 8% by the end of March 2022.

Two years of declining home sales forecast

Source: Fannie Mae Economic and Housing Forecast, November 2021.

Forecasters at Fannie Mae continue to see home sales being constrained by a shortage of listings, sharp increases in house prices and slightly higher mortgage rates. They envision a decline in sales of existing homes over the next two years – from 6.2 percent in 2022, to 5.64 million homes, and an additional 1.3 percent in 2023, to 5.57 million homes.

Not only do listings remain rare in many markets, but “much of the strength in home buying over the past year and a half has been due to first-time buyers pushing ahead with their purchases due to market disruptions. COVID, as well as to take advantage of historically low mortgage rates, ”notes the forecast. This component of first-time homebuyers’ demand is likely to “have to be returned”.

However, rising home prices and listing shortages are good for builders, and despite continued supply chain disruptions and labor shortages, forecasters at Fannie Mae are seeing sales of new homes will rise 14% next year, to 897,000.

Mortgage refinances set to drop by 50%

Source: Fannie Mae Economic and Housing Forecast, November 2021.

Rising house prices also explain why economists at Fannie Mae expect mortgage lenders to increase the total dollar volume of financed purchase loans, even though they are making fewer loans.

The expected 7% increase in purchase loan volume next year, to around $ 2 trillion, would only mitigate part of the expected 50% drop in refinancing, to $ 1.25 trillion. dollars in 2022.

At the current mortgage rate of 2.98%, economists at Fannie Mae estimate that around 43% of outstanding mortgages have an incentive to refinance at least 50 basis points. But many will lose that incentive if rates rise, as expected.

Around 2023

Fannie Mae’s first forecast for 2023 envisions an economy that is likely to have entered “the maturity phase of the business cycle” – with the next recession looming perhaps just around the corner.

A mature stage means growth “has returned to its trend, the labor market is at ‘full employment’ and the Federal Reserve is tightening monetary policy,” according to Fannie Mae. “At this point in the business cycle, the risk of a recession is concentrated, as there is no longer pent-up demand or a slowdown in excess production that gives momentum. The economy is therefore more vulnerable to a reversal of its growth trend by the ensuing shocks. In addition, imbalances or inefficiencies become more exposed in an environment of slower growth and tightening monetary policy. “

While it seems “strange to discuss the next potential recession so soon after the 2020 downturn,” economists at Fannie Mae point out that there were four recessions between 1948 and 1960, and four slowdowns between 1970 and 1983 .

Typically, once the Fed begins to hike rates, “the next slowdown is one to three years later,” the forecast notes. “Uncertainties about the future development of labor productivity and immigration flows will affect the potential length of the cycle, but the current expansion is unlikely to be as durable as the previous one, which was the longest after -world War. II era.

Home price appreciation should calm down

Source: Fannie Mae Economic and Housing Forecast, November 2021.

Fannie Mae economists see house price appreciation slowing down somewhat next year, with the annual appreciation rate returning to single digits in the second half of 2022. inflation rate.

Editor’s Note: The title of this story has been updated to remove an erroneous reference to declines in home prices. While economists at Fannie Mae expect home price appreciation to moderate in the coming months, they do not expect home prices to fall.

Receive the Inman Extra Credit newsletter straight to your inbox. A weekly summary of all of the biggest news in the mortgage world and fences delivered every Wednesday. Click here to subscribe.

Email Matt Carter