Despite Positives, Housing and Mortgage Markets Remain on Downtrend
Written By: Joel Palmer, Op-Ed Writer
Fannie Mae’s latest monthly economic report has several positive pieces of information, however each one has a big “but” attached to it.
For example:
Mortgage rates are down 59 basis points from their recent peak (5.22 percent as of the last Freddie Mac survey), but housing affordability is still a major constraint for potential homebuyers.
Existing home sales in June were somewhat stronger than anticipated, but July’s leading indicators point to a continued slow down.
For-sale home inventories are growing, up 28 percent from a year ago according to realtor.com, but remain low by historical standards.
Homebuilders have increased the supply of new homes for sale by the highest level since 2010, but economists expect builders will slow down because of the combination of high mortgage rates and expanded inventory creating a supply glut.
And finally, Fannie economists have raised their forecast for 2023 mortgage originations by $66 billion, but they have lowered previous forecasts for 2022 originations by nearly the same amount.
“Housing remains clearly on the downtrend – and has been for several months now – due to the combined effects of outsized home price increases and the significant and rapid run-up in mortgage rates,” said Doug Duncan, Fannie Mae senior vice president and chief economist.
“The question for many market observers is how quickly, and with how much additional tightening, the core inflation rate will come down to the Fed’s preferred target. In our view, the labor market’s continued strength suggests that the Fed is likely to maintain its aggressive posture through the end of the year.”
The August 2022 commentary from Fannie Mae’s Economic and Strategic Research (ESR) Group forecasts total home sales to decrease 16.2 percent in 2022. This decline represents a further downward revision from last month’s forecast of a 15.6 percent drop, as recent incoming data point to a faster slowdown in near-term sales than previously expected.
The latest forecast also projects total mortgage origination activity at $2.47 trillion in 2022, down from $4.47 trillion in 2021, and then a further reduced $2.29 trillion in 2023.
Higher mortgage rates over the past year are stifling both the purchase and refinance mortgage markets.
In the purchase market, Fannie downgraded its originations expectation for 2022 by $74 billion to just over $1.7 trillion. The forecast for 2023 purchase volumes have been largely unchanged at just under $1.7 trillion.
Housing affordability is still a major constraint for potential homebuyers. Fannie estimates that as a share of median household income, the principal and interest payment on a median-priced home is just below the highest level since 2005. Mortgage rates are up about 235 basis points from a year earlier and house prices have appreciated on an annual basis by 19.4 percent through the second quarter. Additionally, many existing homeowners are likely reluctant to move due to having a current mortgage with a rate well below current market rates. At 5.22 percent, Fannie estimates that 84 percent of outstanding mortgages are at least 100 basis points below current market rates.
Fannie is forecast 2022 refinance volumes to total $769 billion, $13 billion higher than the previous month’s forecast, driven by lower anticipated mortgage rates. Fannie expects 2023 volume to be $592 billion, up $74 billion from last month, reflecting the downward revision to interest rates this month.
For the overall economy, the ESR Group’s latest forecast of real gross domestic product (GDP) growth for full-year 2022 and 2023 remained essentially flat compared to last month at 0.0 percent and negative 0.4 percent, respectively. The continued expectation that real GDP growth will be negative beginning in 2023 is due to the combined effects of tighter monetary policy weighing on business and residential investment and still-elevated inflation weighing on consumer spending. The ESR Group does expect inflation to slow gradually.
“We maintain the view that a modest recession is likely to emerge in the new year as the labor market softens and the effects of tighter monetary policy are more acutely felt,” said Duncan.
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.
