Impending Direction of Economy Will Have Little Effect on Housing Market
Written By: Joel Palmer, Op-Ed Writer
Fannie Mae economists say recent data points to a stronger economy than previously expected, but a downturn is still imminent.
Regardless of whether the economy enters a recession, the Fannie said in its August commentary that home sales are expected to remain subdued.
“Despite reduced saving, increased rollover credit card balances, and rising credit costs, consumers are sustaining consumption, supported by a decline in inflation,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “Nonetheless, tightening monetary policy takes a toll.”
Fannie’s economists say there are two possible outcomes. The mostly likely, they said, is a mild recession in the first half of 2024. The other is a “soft landing,” which is slow growth with a small increase in unemployment.
What’s important to mortgage underwriters and processors, is that either scenario will have little impact on the housing and mortgage markets.
Fannie said that a recession will help potential homebuyers with better affordability and more inventory stemming from lower interest rates. But those benefits will be offset by a weaker labor market, tighter credit and lower consumer confidence.
On the other hand, if the U.S. economy sidesteps a recession, home sales activity would continue to be suppressed by the continued lack of inventory and other affordability constraints. In addition, many existing owners do not want to give up their current low mortgage rates, so they’re not putting homes on the market.
According to Black Knight, nine out of ten U.S. homeowners with mortgages have rates far below current offerings, creating a substantial disincentive to sell and then try to buy a new home in a much more expensive market.
“The risk to housing activity is that inflation has bottomed out and begins to reaccelerate, requiring additional tightening from the Fed,” said Duncan.
One of the recent bright spots in the housing market is an acceleration of new home building.
The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau recently reported that sales of new single‐family houses in July 2023 were at a seasonally adjusted annual rate of 714,000. This was 4.4 percent above the revised June rate and 31.5 percent above the July 2022 estimate of 543,000.
The seasonally‐adjusted estimate of new houses for sale at the end of July was 437,000. This represented a supply of 7.3 months at the current sales rate.
Black Knight noted that the shortage of existing homes for sale has resulted in increased market share for new homes. Typically, new homes make up between 10 percent and 15 percent of all homes for sale. Currently they account for between 25 percent and 30 percent.
Fannie reported that single-family housing starts jumped in July by 6.7 percent to a pace of 983,000 annualized units. This was 9.5 percent higher than a year prior, the first annual increase since April 2022.
However, based on permits being substantially lower at 930,000, Fannie expects some pull-back in the near term, especially given the recent rise in mortgage rates.
One area that is not helping to increase inventory levels is the foreclosure market. This is a good sign for lenders and the overall market, but the current trend won’t help put more homes on the market or provide affordability relief.
Black Knight data showed that serious delinquencies (90+ days past due) fell to 468,000 in July 2023. This was the lowest level seen since the pre-Great Financial Crisis housing market peak and down 26 percent from July 2022.
There were 220,000 properties in foreclosure pre-sale inventory in July, down 4,000 from the previous month. About 6,100 foreclosed homes were sold that month, 10.75 percent less than in June 2023 and 18.36 percent less than July 2022.
Fannie has not changed its forecast for purchase origination volume in 2023, which stands at $1.3 trillion. For 2024, they have revised upward their previous forecast of purchase mortgage originations volumes by $25 billion to $1.5 trillion, consistent with upward revisions to the home sales forecast.
For refinance mortgages, Fannie has revised down month-over-month given an upward revision to its mortgage rate forecast this month. Refinance volumes are expected to be $261 billion in 2023 and $456 billion in 2024, representing downgrades of $4 billion and $9 billion, respectively, from the July forecast.
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.
