Fannie Mae Downgrades Housing and Economic Forecasts for 2022 and 2023
Written By: Joel Palmer, Op-Ed Writer
Economists at Fannie Mae are becoming increasingly pessimistic about home sales, mortgage origination volume and the overall economy over the next two years.
Fannie’s Economic and Strategic Research Group released its May commentary last week, in which it significantly downgraded previous forecasts for GDP, home sales and mortgage originations.
The new forecast for 2022 GDP growth is 1.3 percent, down from a previous forecast of 2.1 percent. Furthermore, Fannie now expects GDP to contract by 0.1 percent in 2023.
Home sales projections for 2022 were revised downward by 3.7 percent to 6.1 million, while 2023 sales projections were lowered by 4.5 percent to 5.4 million. Total mortgage originations were similarly revised downward. Fannie now expects 2022 origination activity to total $2.7 trillion and 2023 originations to total $2.25 trillion, down from the respective $2.82 and $2.41 trillion they had previously projected.
Fannie said persistent inflation, rising interest rates, and a slowdown of global economic growth are the primary contributing factors to its updated expectations.
“Financial conditions have tightened significantly, and the economy is slowing faster than previously expected as markets adjust to the Federal Reserve’s tightening guidance,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “Uncertainty continues to weigh heavily on markets, with geopolitical risks rising as the Russian war on Ukraine extends into its third month. The impact to prices of expected reductions in agricultural production, as well as continued increases in house prices, suggest to us a difficult path for the Fed to return inflation to its two-percent target rate in a timely manner – and, of course, in the absence of an economic downturn.”
Fannie noted that the 30-year fixed mortgage rate is currently around 5.3 percent, about 219 basis points above where it was in December 2021. This is the fastest rate of increase for such a short period in more than 40 years. Fannie estimated that the principal and interest payment on a median priced home has risen by $500 a month in that time, with the majority of the change occurring since February.
The rapid rise in mortgage rates, according to the commentary, has created a disincentive for potential move-up buyers to purchase a new home. Fannie estimates that 85 percent of current outstanding mortgage borrowers have rates at least 100 basis points below current mortgage rates. Therefore, a household moving even to similarly priced home would experience a much higher mortgage payment.
As a result, about 16.1 percent of listings saw price drops over the four weeks ending May 8, up from 11.7 percent a month earlier and 9.2 percent a year ago. Meanwhile, reports from homebuilders pointing to order cancelations are growing.
“Rising mortgage rates are reducing affordability through higher mortgage-related costs, all while house prices continue to grow," said Duncan. “Historically, rapid and substantial rises in mortgage rates have had the effect of slowing activity, which we reflect in our forecast. Not only is the worsening affordability of homes a problem for potential entry-level homebuyers, but current homeowners are less likely to trade in their existing lower-rate mortgages and list their homes for sale, both of which will likely weigh on sales.”
With mortgage rates rising, the adjustable-rate mortgage (ARM) share of originations has increased as the spread between a 30-year fixed rate mortgage and 5/1 and 7/1 hybrid ARMs has widened. The ARM share of total mortgage applications, according to the Mortgage Bankers Association, has accelerated in recent weeks, now accounting for 11 percent of applications.
Fannie expects refinancing volume to be $797 billion in 2022 and $494 billion in 2023, downgrades of $91 billion and $64 billion, respectively, from the prior month’s forecast.
Something Fannie says it is not concerned about is a repeat of 2008, even if home prices decline in the coming years. Fannie says condition are “considerably sounder” today than they were at the onset of the 2008 financial crisis. Credit quality is better, and both the real estate and financial systems are less leveraged, Fannie noted.
About the Author
As an NAMU® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.
