Fannie Reports that as Home Sales Decline, Mortgage Volume Should Remain Steady
Written By: Joel Palmer, Op-Ed Writer
As mortgage rates increase, the outlook for the mortgage market gets more pessimistic.
In its latest commentary released last week, Fannie Mae’s Economic and Strategic Research Group has lowered its existing home sales outlook through 2023, based on its mortgage application data. Fannie now projects 2022 total year existing sales to decline 16.5 percent from 2021, followed by a further decline of 13.3 percent in 2023.
Fannie also noted that new home sales and construction continue to be weaker than initially anticipated. New home sales fell 12.6 percent in July and were down 32.3 percent from the previous year. Fannie said higher mortgage rates will lead to further softening in the new home market moving forward.
Fannie’s estimates for mortgage originations didn’t change much from previous estimates. Its economists continue to forecast 2022 purchase volume of $1.7 trillion, which unchanged from last month’s forecast. Fannie made a slight downward revision of its 2023 purchase volume to just under $1.7 trillion.
In the refinance market, higher mortgage rates have significantly lowered the expected market size for 2022 and beyond. Fannie now expects 2022 volumes to total $731 billion, $38 billion lower than last month’s forecast. It projects refinance volume to decrease further in 2023 to reach $490 billion, down $102 billion from last month’s forecast.
“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 Senior Vice President and 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 area of mortgage business performing better is home equity lending. Mortgage technology firm Black Knight reports that tappable equity hit an all-time in the second quarter of 2022. This is due to the combination of higher home values and higher mortgage rates preventing traditional refinance business.
Black Knight reports that lenders are going “all-in” on home equity lending to fill revenue voids, with HELOC lending up 30 percent in the second quarter to its highest level in 12 years.
Black Knight cautioned lenders about being too aggressive in the home equity market. Its report suggests that rising rates and the drivers behind them can create risk for those holding second lien debt.
This includes a reversal in home price movement following recent peaks in values. Black Knight said July was the first month in three years in which there was a month-over-month decline in home prices. Fannie Mae noted in its commentary that the average sales price of existing homes fell below average asking price for the first time since March 2021.
Most mortgage holders have enough equity to absorb a certain level of declining values. However, Black Knight cautions that mortgages originated in 2021 and 2022 would face equity challenges if prices fall.
“Under scenarios where home prices dipped by up to 15 percent, 90 percent of mortgage holders who would become underwater bought their homes in 2021 and 2022 – at or near the top of the market,” the company wrote.
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.
