After the biggest mortgage rate hike in 40 years, homes are now less affordable than they were at the height of the housing bubble in 2006, which is expected to lower home sales and slow the pace of growth. home construction this year, Fannie Mae economists said Thursday.
In their last economic and housing outlookFannie Mae economists said while mortgage rates may have peaked, they expect a “significant slowdown” in home sales for the second and third quarters of 2022, followed by a slowdown in the construction of new houses.
It’s not until next year that economists at Fannie Mae’s Economics and Strategy Research Group expect to finally see “a sharp deceleration in house price growth”, with some regions likely to see declines in price. Although there is a chance of a “modest recession” later this year or next, Fannie Mae economists do not see a downturn of the magnitude of the Great Recession of 2007-09 on the horizon.
“Rising mortgage rates are reducing affordability due to rising mortgage costs, while house prices continue to rise,” Fannie Mae chief economist Doug Duncan said in a statement. statement. “Historically, rapid and substantial increases in mortgage rates have had the effect of slowing activity, which we reflect in our forecast. Not only is deteriorating home affordability an issue for potential entry-level buyers, but current homeowners are less likely to trade in their existing lower-rate mortgages and put their homes up for sale, which will likely weigh on sales.
Home sales are expected to drop 11% this year
Fannie Mae economists now expect home sales in 2022 to hit 6.1 million, down 3.7% from their April forecast. The latest forecast for home sales in 2023 is 5.4 million, down 4.5% from the April forecast.
If the latest forecast proves accurate, home sales would decline 11.1% this year and another 11.6% in 2023.
Mortgage rates have climbed 2.19 percentage points since December – the fastest increase in such a short period since 1981, Fannie Mae economists noted. This means that the monthly mortgage payment for a homebuyer who buys the home at the median price has increased by more than $500 over this period.
But the expected slowdown in home sales “is not entirely related to declining purchasing power,” Fannie Mae economists said in remark accompanying their predictions. “Rapidly rising mortgage rates are creating a significant lock-in effect for potential buyers to buy a new home.”
Even moving to a similarly priced home means “a much higher mortgage payment, discouraging such a choice,” Fannie Mae economists said.
“Our analysis of new home listings put on the market shows an 8.4% decline in April on a year-over-year basis, compared to a 3.8% decline in March, suggesting that this deterrent may now be in the works. spirit of many existing. owners”.
Home price appreciation is expected to follow a downtrend
In April, economists at Fannie Mae said they believed house price appreciation had peaked at 19.8% in the first quarter of 2021, and would drop to 10.8% in April. here the last three months of the year. But there is “downside risk” to these projections, which are revised every three months, with the next update in July.
“House prices relative to median household incomes, even taking mortgage rates into account, are now further from the historical norm than the peak recorded in 2006,” Fannie Mae economists said. “We believe this indicates the unsustainability of current house prices relative to longer-term fundamentals, and together with rising interest rates this suggests strong downward pressure on further appreciation. real estate prices.”
House price appreciation is currently expected to fall into single digits next year, falling to 3.2% by the fourth quarter of 2023.
But given the “significant variation” in regional home prices, a national home price appreciation of 3.2% “implies that some areas are likely to experience lower prices,” Fannie Mae economists said.
That doesn’t mean Fannie Mae economists see housing markets heading for another slump in the coming years, as homes remain short of demographic demand, and there hasn’t been the speculative overbuilding that characterized the last housing bubble.
“To be clear, even if house prices were to fall in the coming years, we do not expect a re-emergence of the housing market or the economic turbulence seen during the 2008 financial crisis, as conditions are considerably healthier today. ‘today,” the economists at Fannie Mae said. “The 2008 crisis was a negative feedback loop of poor mortgage credit quality, foreclosures and over-indebtedness of real estate and financial companies that led to a financial crisis and a resulting sharp contraction in employment. These factors are not present today Credit quality is much better and real estate and the financial system are less leveraged.
Mortgage rates may have peaked
After rising faster this year than at any time since 1981, some economists believe mortgage rates may have plateaued. While forecasters from the National Association of Realtors see rates continuing to rise slightly in 2023, economists from Fannie Mae and the Mortgage Bankers Association expect mortgage rates to ease next year.
Fannie Mae economists expect the Federal Reserve to continue to raise the short-term federal funds rate 50 basis points at a time, “until these labor market measures show signs of easing. ‘excessive attenuation’.
With unemployment at 3.6%, it may take a recession for unemployment to return to its historic norm of around 4.5%, economists at Fannie Mae warned.
Last month, economists at Fannie Mae warned of the possibility of a “modest recession” in the second half of 2023. Now they see a risk that a recession could come sooner, as consumer spending “is increasingly constrained by high inflation and rapid growth”. pricing environment.
“Many households, including disproportionately those at the bottom of the income distribution, likely have little savings left to draw on,” Fannie Mae economists warned. “A rise in credit card balances over the past two months suggests that many consumers are increasingly stressed by high inflation and are sustaining consumption growth by turning to credit. This trend is unsustainable. Therefore, without some sustained relief in durable goods, energy and food prices over the next few quarters so that real income growth can return to positive territory, the possibility of a recession in late 2022 becomes more likely.
Mortgages are expected to drop 40% this year
If that were to materialize, Fannie Mae’s latest forecast could be painful for mortgage lenders, who have already been hit hard by the end of the mortgage refinance boom.
Thanks to rising mortgage rates, Fannie Mae expects mortgage lending to fall 40% this year to $2.695 billion. Although rising home prices are dampening home sales, they are expected to help spur 1.2% growth in purchase loans in 2022 to $1.898 trillion. Mortgage refinances are expected to fall 69% this year to $797 billion.
But purchase loan originations and refinances are expected to fall next year, with purchase loan originations for 2023 now expected to fall 7.4%, to $1.758 billion, and refinances to drop 38% additional $494 billion.
“At the current mortgage rate of 5.3%, we estimate that only 1.4% of outstanding loans have a refinancing incentive of at least 50 basis points,” Fannie Mae economists said. “What remains of refinance activity, we expect to be dominated by cash refinances. We estimate that cash refinances accounted for 51% of the refinance market in March and expect this share to increase in the future.
Some mortgage lenders have downsized in recent months to adjust to lower refinance volume, including Better, Pennymac, Guaranteed Rate, Keller Mortgage, Mr. Cooper and Wells Fargo. In the first-quarter earnings report, Rocket Companies Inc. executives said they expect buyout offers made to 2,000 employees to save $180 million a year, while LoanDepot executives said they did not expect to make a profit this year and would lay off workers and suspend the company’s quarterly dividend.
Get Inman’s Extra Credit newsletter delivered straight to your inbox. A weekly summary of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.
Email Matt Carter