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The surprising strength of the US economy has eased fears of a recession — but it also means home prices may continue to rise and mortgage rates may fall faster than expected, Fannie Mae economists said Thursday.
Last month, Fannie Mae economists predicted that this year could end up being the slowest year for home sales since 1995, as potential homebuyers continue to struggle with affordability.
The recent decline in mortgage rates and the prospect that rates will fall below 6 percent next year have prompted mortgage forecasters to raise their forecasts for home sales in 2024 and 2025 — but only by a hair.
Home sales are expected to grow by 10% by 2025
Source: Fannie Mae housing forecast, October 2024.
Fannie Mae’s October housing forecast predicts 2024 home sales will be 4.77 million, up 30,000 units from September’s forecast of 4.74 million sales. If the latest forecast comes to light, this year’s sales will exceed 2023 by 16,000 units – and last year will go down in the history books as the slowest year of the century.
Mark Palim
“While potential homebuyers have noted the decline in mortgage rates over the past few months, they are equally aware that there has been little relief on the home price side, another key driver of affordability, especially for first-time buyers,” Fannie Mae said. Chief economist Mark Palim said in a statement.
“The timing of the long-awaited pick-up in the real estate market, and the additional moderation in housing prices, will depend in part on the willingness of current homeowners to withdraw their low mortgage rates by offering their homes for sale. “
Fannie Mae forecasters envision a bigger sales volume next year, with home sales rising 10% to 5.24 million. That’s 27,000 more than Fannie Mae’s expected September sales.
Most of the sales growth next year is expected to come from existing homes, which Fannie Mae projects will rise 11 percent, to 4.52 million. While new home sales in 2025 are expected to remain flat at 715,000, that’s up from 703,000 in last month’s forecast.
“We have upgraded our new home sales outlook due to lower interest rates in our forecast this month, and we continue to expect a lack of existing homes listed for sale to help support new home sales and lead to a gradual increase in home prices. horizon,” Fannie Mae forecasts.
Home price appreciation is falling
Source: Fannie Mae housing forecast, October 2024.
Fannie Mae projects that October home prices will continue to appreciate next year, but at a slower pace. Although home price appreciation is expected to decline to 3.6 percent by the end of next year, that’s up from the 3 percent Q4 2025 inflation forecast in July.
[Fannie Mae economists produce their housing forecast on a monthly basis, but home price appreciation projections are only updated on a quarterly basis.]High mortgage rates have left many homeowners feeling the “lock-in effect” – they don’t want to put their home on the market because they don’t want to give up the low rate on their existing mortgage. While home sales are expected to slow again next year, the effect of the lockout has kept inventory short in many markets — and helped push prices up.
“We expect housing prices to decline as affordability continues to expand and the number of available homes for sale increases in some regions,” Fannie Mae economists said in a note accompanying their latest forecast. “However, the low level of available homes for sale is still underpinning home price appreciation, especially as income and employment growth remain strong.”
Mortgage rates below 6%?
Source: Fannie Mae housing forecast, October 2024. Mortgage Bankers Association Mortgage Finance Forecast, September 2024.
Fannie Mae forecasts predict that 30-year fixed-rate mortgage rates will fall below 6 percent in the first quarter of 2025 and further decline to an average of 5.6 percent in Q3 and Q4.
But while that forecast was made public on October 17, it was canceled at the beginning of the month. Rates have been rising since then, which Fannie Mae forecasters say creates “excess risk” in their latest mortgage rates and home sales estimates.
Since cutting the 2024 rate by 6.03 percent on September 17, mortgage rates have risen 40 basis points, as strength in the economy appears to allow Fed policymakers to take a cautious approach to future rate cuts.
“Comparatively, the improved economic and labor market conditions are a boon for the housing market,” Fannie Mae forecasts, although recent increases in mortgage rates “may keep home sales at low levels.”
While Fannie Mae’s forecast is for 30-year fixed-rate mortgage rates to rise to 6 percent in Q4 (October, November and December), data tracked by Optimal Blue shows borrowers were locked in at an average rate of 6.43 percent on Wednesday.
Mortgage rates “increased reasonably following strong economic data, indicating an upside risk to our rate outlook but also a downside risk to our sales forecast,” Fannie Mae economists agreed. “Despite changes in mortgage rates, the effects of ‘lock-in’ remain strong, and we expect the recovery in home sales to be modest in the near term.”
Instead of a recession, Fannie Mae’s Economic and Strategic Research (ESR) Group sees economic growth (as measured by gross domestic product, or GDP) falling from 3.2 percent in 2023 to 2.3 percent this year and -2.0 next year.
“While a strong economic outlook will support home buying demand, this will also lead to higher mortgage rates, which will cause existing home sales to decline significantly,” Fannie Mae forecasters said. “In fact, the small bump in mortgage applications seen in September has now narrowed in the latest week’s data.”
Home prices strengthen mortgage originations
Source: Fannie Mae housing forecast, October 2024.
If home sales grow as expected next year and home prices in many markets continue to appreciate, Fannie Mae predicts that mortgage originations will grow 28 percent next year, to 2.14 trillion.
Purchase loan originations are expected to grow 16 percent, to $1.52 trillion, while refinancing could increase 70 percent, to $625 billion.
The construction boom continues to cool
Source: Fannie Mae housing forecast, October 2024.
Although post-pandemic construction continues to cool, Fannie Mae expects single-family homes to start recovering at 996,000 next year. Last month, Fannie Mae expected 989,000 single-family home starts by 2025.
“With continued strength in the labor market, and the low level of existing homes for sale, we expect the new housing market to continue to remain a bright spot,” said Fannie Mae economists. “We have revised upward our new home sales expectations for 2024 and 2025, while slightly increasing our initial forecast for single-family homes.”
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