Sales of existing homes were stronger than expected in July, but Fannie Mae forecasters expect homebuyer demand to cool for the rest of this year and next, citing the lack of homes for sale as the primary impediment to sustained growth.
In their latest monthly forecast, Fannie Mae economists now project home sales will grow by 3.3 percent this year, to 6.68 million homes, up from August’s forecast of 3.1 percent annual growth.
This month’s slightly more optimistic 2021 forecast was largely due to an unexpected 2 percent jump in sales of existing homes from June to July. But Fannie Mae economists say that pace of sales is probably not sustainable, given that for-sale inventories remain near historic lows, and new listings aren’t coming on the market fast enough to meet demand.
Next year, Fannie Mae is projecting that sales of new and existing homes will fall by nearly 2 percent. Fannie Mae economists expect new home sales will grow next year, but not by enough to offset an expected drop in existing home sales.
Several indicators of home sales activity — including purchase mortgage applications and pending home sales — point to near-term softening, Fannie Mae forecasters said, with the annual pace of existing home sales expected to drop to about 5.7 million homes for the rest of the year.
Annual pace of home sales, by quarter
Annual pace of new and existing home sales, by quarter. Third quarter of 2021 and beyond are projected. Source: Fannie Mae Economic and Housing Outlook, September 2021.
That’s down from a peak pace of 6.66 million existing home sales per year seen during the final three months of 2020, when pent-up demand from the second quarter of 2020 — the outset of the pandemic — was unleashed.
“We believe home purchase demand is cooling somewhat as the housing market normalizes,” Fannie Mae economists said. “According to Redfin, the share of homes with offers written by their agents with multiple bidders fell to 59 percent in August. While still high, this was down from 74 percent this past spring. Still, we continue to see the primary impediment to sales being a lack of homes for sale.”
There was only a 2.6-month supply of listings on the market in July, and new listings are still coming on the market at the same rate as 2019 — too slowly to maintain the pace of sales seen during July.
A monthly Fannie Mae survey of homebuyer sentiment remains near historic lows, and those who say it’s a bad time to buy are likely to cite high home prices and a lack of supply as their primary rationale.
Fannie Mae economists expect the double-digit annual home price appreciation seen during much of the pandemic to cool dramatically, but not until next year.
Annual home price appreciation, by quarter
Annual home price appreciation, by quarter. Third quarter of 2021 and beyond are projected. Source: FHFA Purchase-Only Index, Fannie Mae projections. Fannie Mae Economic and Housing Outlook, September 2021.
Fannie Mae forecasters aren’t expecting inventories to swell dramatically because of foreclosures or new home construction, either.
About 1.6 million homeowners who put their mortgage payments on hold during the pandemic will soon lose the protection of forbearance programs, and a moratorium barring foreclosure proceedings against homeowners with federally-backed mortgages expired at the end of July.
But Fannie Mae economists anticipate only “a modest increase in the number of homes placed on the market as the foreclosure moratorium ends,” in part because of an improving labor market and high levels of home equity.
“Of course, some share of homes in forbearance will likely end up listed for sale, but given existing supply tightness, we do not believe the end of the moratorium will fundamentally change the sales pace or the path of house price appreciation over the next year,” Fannie Mae forecasters said.
Homebuilders continue to face supply constraints, including a shortage of workers in skilled trades, that led Fannie Mae economists to push back some of the new housing sales they expected to see in the fourth quarter back to 2022.
New and existing home sales
Annual sales of new and existing homes. 2021 and 2022 are projected. Source: Fannie Mae Economic and Housing Outlook, September 2021.
Although Fannie Mae projects new home sales will grow by 11.5 percent next year, to 881,000, that would not be enough to offset a projected 3.6 percent drop in existing home sales, to 5.676 million.
All told, Fannie Mae economists project sales of new and existing homes will fall 1.8 percent in 2022, to 6.557 million.
The pandemic could prevent home sales from reaching those levels next year, due to “the varying responses of consumers, the labor market, and policymakers to the evolving health risks” that remain. The other key risk to the housing forecast “is a possible rise in mortgage rates precipitated by a more persistent increase in inflation or inflation expectations,” Fannie Mae economists warned.
Fannie Mae mortgage rate forecast
Average rates for 30-year fixed-rate loans by quarter. Third quarter of 2021 and beyond are projected. Source: Fannie Mae Economic and Housing Outlook, September 2021.
For now, Fannie Mae sees mortgage rates rising gently next year, to an average of 3.2 percent during the final three months of 2022. That would still be lower than going into the pandemic.
Doug Duncan
But Fannie Mae Chief Economist Doug Duncan said his team expects inflation to remain elevated next year, and that rising home prices and rents could create additional pressure.
“Given the strength of recent house price appreciation and rent growth, we continue to believe that the contribution from housing to underlying inflation has yet to be fully realized within the official measures of inflation,” Duncan said in a statement. “Further, affordability remains a challenge, even with mortgage rates near historic lows; if the pace of income growth doesn’t keep up with inflation and interest rates rise more than expected, we’d expect housing activity to slow from our current projections.”
Mortgage purchase loans and refinancing
Mortgage refinancing and purchase loan originations by year. 2021 and 2022 are projected. Source: Fannie Mae Economic and Housing Outlook, September 2021.
Fannie Mae projects that even with the expected drop in home sales, rising home prices will help purchase mortgage loan volume grow by 6.3 percent in 2022, to $1.941 trillion.
Rising mortgage rates, however, are expected to slam the brakes on mortgage refinancings, which are expected to plummet by 47.7 percent next year, to $1.31 trillion.
All told, mortgage lenders are expected to do 25 percent less business next year, with purchase and refinancing loan volume falling from a projected $4.33 trillion this year to $3.25 trillion in 2022.
