Home Sales Forecast Surges as

Fannie Mae jumped up its forecast for real GDP on a
Q4/Q4 basis this week, revising it from 4.8 percent in last month’s report to
5.5 percent.
The company’s economists said they believe this strength partially
reflects a pulling forward of growth from 2022, so their estimate for next year
has been revised downward by a half point to 3.2 percent. They also said that
incoming data for both economic growth and home sales for 2021 were stronger
than anticipated. “We continue to expect both to decelerate, but our prior call
on the timing appears to have been premature,” the December report says.

Existing home sales moved higher in October,
increasing 0.8 percent to an annualized 6.34 million units. Pending sales, a
leading indicator of existing sales, rose 7.5 percent and purchase mortgage
applications also moved higher and, along with other metrics such as days on
the market and the ratio of sales to list price, indicate a reversal of previous
softening. While this may indicate that some buyers are moving plans forward in
anticipation of higher interest rates, they might also mean stronger near-term
sales than earlier anticipated. Fannie Mae has made large adjustments to total
home sales in Q4 2021 and early 2022, expecting them to rise 7.1 percent
compared to 2020, up from the previous 5.3 percent gain. Those sales will
soften next year, dipping by 1.4 percent as inventory problems persist and
affordability becomes a larger concern
, and decline another 3.8 percent in
2023.

Right now, it is the lack of listings that are
constricting home sales, but the company expects that ongoing price hikes
coupled with upwardly drifting mortgage rates will make affordability the limiting
factor next year. Demand has been buoyed, in part, by higher-income renters moving
into the market and with stimulus checks bolstering downpayment funds. This probably
pulled home purchases forward, both because of low interest rates and to meet changing
needs due to the pandemic. 

With prices continuing to rise and savings diminishing
over time, the pool of buyers able to buy is likely shrinking. Secondary market
data shows that the average back-end debt-to-income ratio (DTI) for first-time
homebuyers was moving up meaningfully through October, suggesting increasing affordability
pressure. A similar increase in 2018 foreshadowed a slowdown in sales and house
price growth, while regional variation helped explain where the slowdown was
greatest. This indicator appears to be similarly pointing to softening purchase
demand in 2022 with some of hotter metro areas perhaps confronting outsized
deceleration.

Higher home prices are supportive of home construction, but builders continue
to face labor and supply chain problems which are limiting new home sales. The
total number of single-family homes under construction rose again in October to
the highest level since May 2007, an unprecedented order backlog, and builders
report purposely limiting sales because they can’t keep up with production. Fannie
Mae expects supply problems will persist through next year, but also that more
homes will be completed over time, adding to inventory, and freeing up some
capacity so starts can increase. Data on lots under development also indicate
that builders are preparing to make significantly more homes available next year.
New home sales should accelerate by mid-2022 along with a modestly faster pace
of construction starts. The added inventory and a waning of demand will put
some downward pressure on home price growth and the company expects the 16.6
percent growth this year, as measured by the Federal Housing Finance Agency
(FHFA) index, will wind down to 7.4 percent in 2022.

Uncertainty regarding inflation, monetary policy, and interest rates also
have implications for housing activity. A mortgage rate spike due to upwardly
adjusting inflation expectations would probably mean a faster slowdown in sales
and price growth. However, should there be an expectation of slower growth,
rates could fall, sparking home sales and moving a slowdown to later in the
forecast horizon.

The company still expects to see some upward drift of both the ten-year
Treasury and the 30-year mortgage rate although they have modestly reduced that
path relative to their prior projection. It sees the 30-year mortgage rate averaging
3.2 percent for 2022 and 3.5 percent for 2023 but adds that uncertainty over
the future path of monetary policy
and how markets will respond to it leads to
a wide range of plausible rate paths moving forward.

The revised sales along with a slightly lower estimate of interest rate
growth has allowed Fannie Mae to increase its forecast for mortgage
originations. There are small revisions to the purchase origins, consistent
with those to the housing outlook. This year’s purchase volume will total $1.9
trillion, $13 billion higher than last month’s forecast. Volumes will grow 8
percent in 2022 to $2 trillion, a small upgrade from last month’s forecast. Volumes
will flatten in 2023 as rising prices offset slowing home sales.

The outlook for refinances was revised higher by $27 billion to $2.6
trillion this year and the 2022 forecast was raised by $49 billion to $1.3
trillion, as the lower mortgage rate forecast boosts volume. The projection for
2023 is unchanged. At the current 3.1 percent mortgage rate, an estimated 38
percent of outstanding mortgage balances have at least a 50-basis point
incentive to refinance. 

These revisions will bring total originations to $4.5 trillion rather than $4.4
trillion in the previous version. For 2022 and 2023, originations are expected
to be $3.4 trillion and $3.1 trillion, respectively, representing an $86
billion upward revision for 2022
and a minimal change to 2023.

The economists see accelerating inflation and the market and policy responses
to it as posing a significant risk to its outlook. Price gains are now likely
weighing on consumer spending and are expected to prompt a more aggressive pace
of Federal Reserve tightening. During this period of monetary policy
transition, long-run interest rates could move significantly in either
direction depending on market perceptions of how successful monetary and fiscal
policy will be at containing inflation without excessively slowing growth. Rate
uncertainty is therefore a major risk.

The November Consumer Price Index (CPI) showed annual inflation hitting 6.8
percent, the highest in 39 years, and Fannie Mae projects it to average 7.0
percent in Q1 2022 before decelerating to 3.8 percent by the end of 2022. The
Fed’s preferred measure, the core PCE deflator, could average 4.8 percent
annually in Q1, well above the long-term target of 2 percent.

The company now expects a 25-basis point Fed interest rate hikes in the
second and fourth quarters of 2022
and continuing quarterly through 2023. It believes
there could be more aggressive tightening if inflation fails to decelerate in
coming months due to supply chain issues taking longer to resolve, consumer
spending remaining more robust, or if energy prices spike relative to its expectations.

Source

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