Fannie Expects Lower Mortgage Rates and Moderating Prices in Near-term Housing Market
Written By: Joel Palmer, Op-Ed Writer
Fannie Mae economists expect home prices to moderate soon following a second quarter in which values grew higher than expected.
Fannie’s latest economic commentary also includes more near-term optimism for mortgage rates, existing sales and purchase originations. But Fannie is downgrading its forecasts for new home sales, housing starts and refinance mortgages.
Fannie’s latest forecast noted continuing sluggishness in home sales due to affordability constraints. However, the latest forecast for existing sales has a modest upward revision due to predictions of lower mortgage rates than previously forecasted. The forecast for new home sales has been slightly lowered.
Fannie now expects total home sales to be 4.81 million in 2024 (little changed from 4.82 million previously) and 5.26 million in 2025 (5.27 million previously).
Mortgage rates are expected to be lower going forward than previously expected. Fannie has forecast the 30-year fixed mortgage rate to average 6.8 percent in 2024 and 6.4 percent in 2025, though it warns interest rates remain volatile, particularly given changes to Fed policy expectations.
Fannie has also revised upward its quarterly home price forecast and now expects 2024 and 2025 prices, as measured by the Fannie Mae Home Price Index, to rise 6.1 percent and 3.0 percent, respectively. This is up from 4.8 percent and 1.5 percent in its April forecast.
Home prices rose 3 percent in the second quarter on a non-seasonally adjusted basis and were up 6.9 percent from a year earlier. While this was stronger appreciation than previously forecast, it still represents a deceleration from 7.3 percent annual growth in the first quarter.
The upward revision to the home price outlook drove a corresponding increase to the forecast for origination volumes; however, this was largely offset by a downward revision to expected refinance activity. Fannie now forecasts 2024 originations to total $1.70 trillion (previously $1.71 trillion) and 2025 total originations to total $2.11 trillion (previously $2.07 trillion).
Fannie has upgraded expectation for 2024 purchase origination volumes by $14 billion from the prior month’s forecast, driven by our higher home price growth expectations. In 2025, its economists expect purchase volumes to grow by 14 percent year over year to $1.6 trillion, representing an upgrade of $26 billion from last month’s forecast.
Fannie has downgraded expectations for refinance originations in 2024 by $26 billion relative to last month's forecast, to $346 billion. They expect refinance volumes to grow to $563 billion in 2025 as home prices continue to rise and mortgage rates gradually fall.
Fannie has lowered expectations for single-family and multifamily housing starts. Single-family starts fell in May, as did permits.
“The housing market continues to wait for affordability to improve, even as the supply of new and existing homes for sale slowly rises,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “The slight decline in mortgage rates of late, following data pointing to gradually slowing economic growth, has not been enough to overcome the significant affordability constraints imposed on would-be homebuyers.”
Fannie’s economists predict that inflation, as measured by the Consumer Price Index (CPI), will end the year at 2.9 percent. It had previously forecasted a 3.2 percent CPI for 2024.
Due to better inflation prints and signs of slowing in the labor market, Fannie now expects the Federal Reserve to cut rates in both September and December.
Fannie predicts real Gross Domestic Product (GDP) growth in 2024 of 1.6 percent, unchanged from previous forecasts. Their outlook for 2025 was revised upward one-tenth to 2.0 percent.
Home price growth in the second quarter was stronger than previously anticipated but will likely moderate soon, closing 2024 and 2025 at annual rates of 6.1 percent and 3.0 percent, respectively, according to the July 2024 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. Despite a more than 30 percent increase in listings of homes available for sale compared to a year ago, certain indicators of housing activity remain soft, as evidenced in part by fewer existing home sales in May compared to a year ago. This dynamic of gradually increasing supply and affordability-constrained demand is expected to cause home prices, which were up 3 percent on a non-seasonally adjusted basis in the second quarter, according to the Fannie Mae Home Price Index, to moderate going forward. Additionally, the ESR Group notes recent regional volatility in listings and home prices, as many large metros in the Sunbelt, for example, now have inventory levels that match or even exceed for-sale inventories in 2019. This contributed to the ESR Group revising downward its starts and new home sales forecasts; notably, however, it revised upward its existing home sales forecast due to a modestly lower mortgage rate path.
The ESR Group made only modest revisions to its economic growth outlook, as incoming data have come in largely in line with expectations for slowing growth. Notably, due to two consecutive lower-than-expected prints of the Consumer Price Index (CPI), the ESR Group downwardly revised its inflation forecasts and now expects the CPI to end the year at 2.9 percent and the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) Index, to end the year at 2.5 percent. Due to the better inflation prints and signs of slowing in the labor market, the ESR Group now expects the Federal Reserve to cut rates in both September and December.
“The housing market continues to wait for affordability to improve, even as the supply of new and existing homes for sale slowly rises,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “The slight decline in mortgage rates of late, following data pointing to gradually slowing economic growth, has not been enough to overcome the significant affordability constraints imposed on would-be homebuyers. As such, despite more homes being listed for sale, actual home sales have not picked up. We continue to expect home price growth on a national level to decelerate – but remain positive -- over the near term, but it should be noted that conditions often vary by region, particularly as it relates to supply. For instance, many Sunbelt metros are currently seeing significant increases in for-sale inventories, in part due to new construction, while supply in much of the Northeast and Midwest remains extremely tight. In aggregate, we expect these varied market conditions to lead to a slight decline in total new home sales nationally for the full-year 2024, but a slight increase in existing homes sales.”
https://www.fanniemae.com/research-and-insights/forecast/economic-developments-july-2024
We've made only modest revisions to our economic growth outlook this month; our expectation for real Gross Domestic Product (GDP) growth in 2024 is unchanged at 1.6 percent, while our outlook for 2025 was revised upward one-tenth to 2.0 percent. More notably, given the two softer-than-expected Consumer Price Index (CPI) reports in May and June, we have revised downward our inflation forecast. We now expect the CPI to end 2024 at 2.9 percent (previously 3.2 percent), and the Federal Reserve’s preferred core Personal Consumption Expenditures (PCE) price measure to be 2.5 percent (previously 2.7 percent). We also now believe that the Federal Reserve is likely to cut rates in September and then again in December.
Home sales remain sluggish as affordability continues to constrain purchase demand, though we have modestly revised upward our existing home sales outlook due to a lower mortgage rate forecast. In contrast, we have downwardly revised our outlook for new home sales. Combined, we expect total home sales to be 4.81 million in 2024 (little changed from 4.82 million previously) and 5.26 million in 2025 (5.27 million previously).
We have also revised upward our quarterly home price forecast and now expect 2024 and 2025 prices, as measured by the Fannie Mae Home Price Index (FNM-HPI), to rise 6.1 percent and 3.0 percent, respectively. This is up from 4.8 percent and 1.5 percent in our April forecast.
The upward revision to our home price outlook drove a corresponding increase to our forecast for origination volumes; however, this was largely offset by a downward revision to our expectation for refinance activity. We now forecast 2024 originations to total $1.70 trillion (previously $1.71 trillion) and 2025 total originations to total $2.11 trillion (previously $2.07 trillion).
Incoming Data Point to Below-Trend Growth, Cooling Inflation
Recent data releases indicate that economic growth is decelerating, principally due to softening consumer spending growth, which was largely in line with our previous forecast. The third release of Q1 2024 GDP showed another downgrade to personal consumption expenditures (PCE) to 1.5 percent annualized; a full percentage point lower than originally reported. Additionally, monthly personal consumption data shows spending has not picked up much in the second quarter, suggesting consumers may finally be retrenching toward a more historically typical saving rate, a dynamic we have long expected. Spending growth in recent years has eclipsed growth in incomes, which we’ve believed was unsustainable. Business surveys, including contractionary June readings in the Institute of Supply Management’s (ISM) manufacturing and services indices, also point to below-trend growth in the near term. As such, we have left our forecast for 2024 Q4/Q4 GDP unchanged at 1.6 percent, a pace below what is believed to be the long-run growth trend.
June employment data has also shown signs of softening. While nonfarm payrolls increased by a relatively solid 206,000, the two prior months were revised downward by a combined 111,000 jobs. This brought the three-month moving average to 177,000, the slowest pace in about three and a half years. The unemployment rate also ticked up another one-tenth to 4.1 percent, four-tenths higher than where it started the year. Measures of unemployment duration are also pointing to labor market softening. While we aren’t yet concerned about significant labor market deterioration, as household balance sheets are solid in aggregate, incomes continue to grow, and unemployment claims remain in a normal range, historically, rises in the unemployment rate of the magnitude observed over the past year have often predated economic contractions and, therefore, merit monitoring.
The June print of the CPI was well below consensus expectations and led to a downward revision to our near-term inflation outlook. While the 0.1 percent month-over-month decline in headline inflation was helped by falling energy, vehicle, and airline ticket prices, disinflation was relatively broad-based. Core CPI rose just 0.1 percent over the month and fell to 3.3 percent compared to a year ago, the lowest annual inflation rate in more than three years. The long-awaited slowing in shelter prices also materialized in June, with both rent of primary residence and owners’ equivalent rent (OER) registering their smallest monthly gains since 2021. Other core services that were elevated in the first quarter, such as medical care services and motor vehicle insurance, also slowed in the second quarter. While two reports do not definitively establish a trend, recent inflation data have been encouraging and suggest further sustained progress is likely. We have reinstated our expectation for Federal Reserve rate cuts in both September and December (previously just December), as we believe the combination of slowing labor market conditions and encouraging inflation data will be sufficient for the Fed to begin easing policy soon.
Home Prices Come in Stronger than Expected, Regional Slowing Likely
Home prices rose 3.0 percent in the second quarter on a non-seasonally adjusted basis, as measured by the Fannie Mae Home Price Index, and were up 6.9 percent from a year earlier. While this was stronger appreciation than we had previously forecast, it still represents a deceleration from 7.3 percent annual growth in Q1. We have modestly upgraded our home price outlook for 2024 largely based on these stronger incoming data for the first half of the year, but we continue to expect deceleration going forward as affordability constraints weigh on home purchase demand.
For-sale active listings continue to rise on a year-over-year basis and are now up 37 percent as of June, according to Realtor.com. Despite the rise in listings, the pace of sales remains subdued. Existing home sales are down 2.8 percent from a year ago in May. This growing gap between listings and sales growth is leading to comparative loosening in the housing market as affordability appears to be holding many buyers back. Redfin’s demand index, which measures requests for showings and listing views, is down 17 percent from a year ago, while the weekly share of listings experiencing a price cut was 6.5 percent as of the week ending July 7, up from 5.5 percent over the corresponding week a year prior.
The trend of active listings has varied significantly by region. Sun Belt metros, particularly in Florida and Texas, have experienced larger inventory growth compared to the national average. Total inventories of for-sale homes in these states are at or even a bit above 2018-2019 numbers. While 2018-2019 was still a relatively tight market, the trend in the Sun Belt region continues toward an overall loosening, and buyer demand is softer now compared to before the pandemic. In contrast, most Northeast and Midwest metro areas continue to experience for-sale inventories near recent lows and remain very supply constrained. What can be seen in recent historical data already is that metro areas with the greatest for-sale inventories relative to their pre-pandemic baseline have experienced softer home price growth over the second quarter.
At least some of this regional listing and price divergence is likely due to variations in homebuilding activity over recent years. Many of these sunbelt metros have experienced a comparative boom in building post-pandemic, and this added supply is likely easing some of the price pressures. We also suspect some of the softening demand in Sunbelt areas is due to demand previously being pulled forward following the pandemic, as many households accelerated their retirement move plans and second home purchases.
While metro-area single-family construction permitting data does not yet show a meaningful slowdown in new construction in the regions with the greatest growing supply of existing listings, historically, a looser resale market leads to a slowdown in new construction. We have therefore modestly moved downward our single-family starts and new home sales forecasts to reflect comparative weakening in some of the top-building metros. Still, homebuilders' margins have been strong enough that they appear willing to help drive sales by offering consumers more incentives, so we are still expecting comparatively robust new construction over our forecast horizon – but more modest than previously forecast. We now project total new home sales to be 639,000 in 2024, compared to 667,000 previously, and 716,000 in 2025, compared to 752,000 previously.
Housing & Mortgage Forecast Changes
Mortgage Rates
We revised our mortgage rate forecast downward month over month. We now forecast the 30-year fixed mortgage rate to average 6.8 percent in 2024 and 6.4 percent in 2025. However, interest rates remain volatile, particularly given changes to Fed policy expectations, which adds risk to our outlook. Following the completion of our start-of-the-month interest rate forecast and as of this writing, 10-year Treasury rates have decreased approximately 25 basis points following the May CPI release, leading to some downside risk to our current baseline mortgage rate forecast.
Existing Home Sales
Existing home sales fell slightly to a seasonally adjusted annualized rate (SAAR) of 4.11 million in May. We revised modestly upward our near-term forecast due to the lower mortgage rate path, and we continue to forecast existing sales to trend gradually upward over our forecast horizon.
New Home Sales
New single-family home sales plunged 11.3 percent in May to a SAAR of 619,000, though there was a large upward revision to the April number, leaving the average of new sales in April and May modestly above our second quarter forecast. However, continued increases in available existing homes-for-sale in key regions suggest demand for new homes will cool, and that there may be more downward momentum in the near term than previously expected.
Single-Family Housing Starts
We’ve revised downward our expectation for single-family starts, as incoming data point to a weaker near-term outlook for single-family construction. Starts fell in May slightly more than expected, and other indicators, such as the continued decline in permits along with the lowest homebuilder confidence reading this year, suggest a lower path.
Multifamily Housing Starts
We have downgraded our multifamily housing starts forecast based on a reassessment of incoming data. While the multifamily starts series is notoriously volatile, we expect construction to remain subdued in the near term. However, we believe demographic trends are likely to continue to support further multifamily construction in the intermediate term.
Single-Family Mortgage Originations
This month we have upgraded our expectation for 2024 purchase origination volumes by $14 billion from the prior month’s forecast, driven by our higher home price growth expectations. We now expect home prices to grow 6.1 percent in 2024 compared to 4.8 percent in the prior forecast. In 2025, we expect purchase volumes to grow by 14 percent year over year to $1.6 trillion, representing an upgrade of $26 billion from last month’s forecast.
We have downgraded our expectation for refinance originations in 2024 by $26 billion relative to last month's forecast to $346 billion, in line with recent data on mortgage applications from the Fannie Mae Refinance Application-Level Index (RALI). We expect refinance volumes to grow to $563 billion in 2025 as home prices continue to rise and mortgage rates gradually fall.
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.
