Don’t expect mortgage rate relief in 2023, says Fannie Mae in new forecast

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With the Federal Reserve still struggling to get inflation under control, Fannie Mae economists no longer expect mortgage rates to ease much next year, even with a “moderate recession” likely looming.

In their latest monthly outlook, forecasters at Fannie Mae again lowered their projections for home sales in 2022 and 2023 as mortgage rates recently hit new highs in 2022 awaiting further Fed tightening. .

Doug Duncan

“In our view, the recent surge in interest rates is due to the market’s recognition of two critical factors: that inflation is indeed not transitory, and that to bring it under control, the Federal Reserve will have to be resolute , even at the risk of possible recessions,” Fannie Mae chief economist Doug Duncan said in a statement. expectation of our forecast for a moderate recession beginning in the first quarter of 2023. That said, the rate hike is having the Fed’s desired effect on housing, as home price growth began to slow in June .

Home sales in 2022 are expected to drop 17.2%

Source: Fannie Mae Housing Forecast, September 2022

Last month, economists at Fannie Mae predicted a 16.2% decline in total home sales in 2022. Now, with mortgage rates surging past 6% to the highest levels since 2008, they are slumping. expect 5.71 million new and existing homes to change hands this year, which would represent a 17.2% drop from last year.

Next year, Fannie Mae expects new and existing home sales to fall another 12.8% to 4.98 million, down from August’s forecast of 5.18 million total home sales in 2023. .

The revision was mainly driven by lower expectations for new home sales, which are now expected to fall 22.3% this year to 599,000 homes. That’s more drastic than the projected 16.5% decline in existing home sales, which are now expected to hit 5.109 million this year.

Although new home inventories hit their highest level since 2009 in July, homebuilders “do not appear to be providing enough incentive to move growing inventories,” Fannie Mae analysts said. “However, many publicly traded homebuilders continued to post historically high gross margins in the second quarter, suggesting there is room for increased rebates going forward.”

Fannie Mae sees new home sales fall another 7.9% in 2023 to 552,000 and existing home sales fall 13.3% to 4.427 million.

Mortgage rates should not fall further

Source: Fannie Mae Housing Forecast, September 2022

The most drastic change to Fannie Mae’s forecast from August is the projection of the next direction mortgage rates could take. Last month, forecasters at Fannie Mae thought 30-year fixed-rate mortgage rates likely peaked in the second quarter at 5.2% and would decline for five straight quarters to an average of 4.4% over the course of the year. of the second half of 2023.

But in their latest forecast, economists at Fannie Mae warn that while the economy is likely heading into a recession next year, the Fed still has some way to go before inflation is brought under control.

Mortgage rates are now expected to peak at 5.7% in the last quarter of this year and the first quarter of 2023, with only a modest decline to 5.5% by the last three months of next year.

In a Sept. 19 forecast, economists at the Mortgage Bankers Association remained slightly more optimistic, predicting rates will peak at 5.5% in the second half of 2022 before falling back to 5.0% by the end of the month. next year.

Fannie Mae economists say they see a shift in inflation dynamics that will make it harder for the Fed to pull off a soft landing.

“While we think headline inflation has likely peaked, strong rent growth and a tight labor market are leading to a more persistent inflationary trend, which has historically been difficult to contain without a general economic contraction,” they said. warned Fannie Mae forecasters.

While energy costs have eased, inflationary pressures remain high and the tight labor market “could lead to a hard-to-reverse price-wage spiral.”

From the Fed’s “theoretical perspective,” unemployment would need to rise from 3.7% to over 4.5% for labor market inflationary pressures to ease, Fannie Mae economists said.

“Even taking into account the Fed’s rate hikes to date, the current policy stance is still, arguably, near neutral, meaning a rate that is neither stimulative nor restrictive for economic activity. “said the economists at Fannie Mae. “We think market expectations are starting to price more in the possibility that the Fed will need to raise its short-term rate well above neutral and perhaps hold it there for a while in order to induce sufficient easing in the labor market to achieve price stability.

Mortgage refinances down 72.6% this year

Source: Fannie Mae Housing Forecast, September 2022

Fannie Mae’s latest forecast includes a “minor upward revision” of $101 billion to estimated mortgage originations for 2021 following annual benchmarking of Home Mortgage Disclosure Act (HMDA) data.

At $1.706 trillion, Fannie Mae’s forecast for the volume of mortgages purchased in 2022 remains essentially unchanged from August, thanks in part to continued appreciation in home prices. That would represent a 10.2% drop from a year ago. The volume of purchase loans is expected to decline another 1.5% in 2023 to $1.681 billion.

But rising mortgage rates have dramatically reduced the expected size of the market for 2022 and 2023 refinancing. Fannie Mae now expects mortgage lenders to refinance $731 billion in mortgages this year, down $38 billion from forecasts. in August. That would represent a drop of 72.6% from a year ago.

Fannie Mae expects refinancing volume to fall another 33% next year to $490 billion, down $102 billion from last month’s forecast.

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