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A weaker-than-expected spring has prompted Fannie Mae economists to cut their forecast for 2024 home sales, to the point where it’s now looking like this year will hardly be better than last year.
But more listings are starting to come onto the market — particularly in the Sun Belt — and the economy is cooling at a pace that should help mortgage rates stay on their current downward trajectory, economists at the mortgage giant said Friday.
Doug Duncan
“The economy appears to be slowing, and recent readings offer hope that inflation is cooling after progress on that front stalled in the first quarter – a trend that will likely need to be sustained for the Fed to feel comfortable cutting rates,” Fannie Mae Chief Economist Doug Duncan said in a statement. “Additionally, the labor market is showing signs of a gradual slowdown, with the unemployment rate creeping up to 4 percent in the June report.”
But home sales won’t pick up until there’s “some combination of continued household income growth, a further slowing of home price appreciation, or a decline in mortgage rates to bring affordability within range of many waiting first-time and move-up homebuyers,” Duncan said.
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Rebound in home sales pushed back to 2025
Source: Fannie Mae Housing Forecast, June 2024.
Sales of existing homes fell 1.9 percent in April, to an annualized pace of 4.14 million.
“This was somewhat weaker than we had anticipated, and recent purchase mortgage application data also point to near-term weakness,” Fannie Mae economists said in commentary accompanying their latest forecast. “As such, we have downwardly revised our existing home sales outlook and now project 2024 existing sales to total 4.15 million (previously 4.20 million). This now represents only a minor increase of 1.5 percent from 2023 total year existing sales.”
That near-term weakness was confirmed Friday with the release of the latest existing home sales data for May from the National Association of Realtors, which showed sales fell for the third month in a row, to a seasonally adjusted annual rate of 4.11 million.
“This sales softness is happening while listings continue to rise. We read this divergence to mean more homeowners are no longer putting off their decision to sell, despite the so-called ‘lock-in effect,’ perhaps out of a belief that mortgage rates will remain higher for longer,” Fannie Mae economists said. “However, affordability constraints are limiting the number of buyers willing and able to purchase these homes.”
Home prices are often “sticky” on the way down, but a “gradual loosening” of inventory is likely to decelerate home price growth, Fannie Mae economists predicted.
NAR put the months supply of inventory at 3.5 in April, up from 3.0 months a year ago. And while the numbers for May were too late for Fannie Mae forecasters to incorporate into their forecast, months supply of inventory was up again last month, to 3.7 months, NAR reported.
But those are national numbers, and Fannie Mae forecasters noted there’s a “strong geographic skew” to recent listings growth.
“Many of the previously hot Sun Belt markets are where listings are disproportionately rising. These metros also tend to be markets with a higher degree of new construction in recent years, and now some of them have for-sale inventory levels similar to 2019.”
Close to half of the total growth in listings nationwide over the last year can be chalked up to Florida and Texas.
“This suggests that these markets will experience comparative price softness going forward while supply remains comparatively tight in many of the northeast and midwestern markets,” Fannie Mae economists said.
For now, the scarcity of existing homes in many markets is helping prop up new home construction and sales.
But sales of new homes dipped 4.7 percent from March to April, to a seasonally adjusted annual rate of 634,000. That’s a 7.7 percent decline from a year ago.
With a 9.1 month supply of new homes on the market in April — the highest since November 2022 — Fannie Mae economists have lowered their expectations for new home sales in Q2 2024 and Q3 2024.
Fannie Mae now expects 2024 new home sales stay flat from a year ago at 667,000, but grow by 13 percent next year.
Easing mortgage rates are expected to help boost sales of existing homes by 9 percent next year, to 4.51 million.
Mortgage rates expected to keep falling
Source: Fannie Mae Housing Forecast, June 2024; MBA Mortgage Finance Forecast, May 2024.
Recent economic data, including the Consumer Price Index (CPI) and Producer Price Index (PPI) coming in cooler in May than recent months, has Fannie Mae economists regaining confidence that mortgage rates have room to come down this year.
“This welcome news on the inflation front led to a significant drop in the 10-year Treasury rate and an increase in the odds of rate cuts this year,” Fannie Mae forecasters said.
Last month, Fannie Mae forecasters predicted rates on 30-year fixed-rate loans wouldn’t drop below 7 percent this year, and would still be averaging 6.6 percent in Q4 2025.
With mortgage rates already under 7 percent, Fannie Mae is forecasting that 30-year fixed-rate loans will drop to 6.7 percent during Q4 2024, and to 6.3 percent by the end of next year.
In their most recent forecast, released May 16, economists at the Mortgage Bankers Association envisioned a steeper decline, with 30-year fixed-rate loans hitting 6.5 percent by the end of this year, and dropping below 6 percent in the final three months of next year.
While Fannie Mae economists don’t expect the Fed to cut rates until December, “additional soft inflation reports, especially if combined with a growing acceptance that payroll employment is perhaps overstated, makes a September cut still a real possibility.”
The Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, is set to be updated on June 28.
Home prices propping up purchase mortgage originations
Source: Fannie Mae Housing Forecast, June 2024.
Diminished expectations for home sales mean Fannie Mae forecasters now expect purchase mortgage volume to total $1.3 trillion in 2024, $20 billion less than last month’s forecast.
But thanks to rising home prices, that would still represent 10 percent growth from the $1.22 trillion in purchase mortgages originated last year.
As mortgage rates come down and home price appreciation decelerates next year, Fannie Mae projects purchase mortgage originations will grow by an even stronger 14 percent in 2025, to $1.5 trillion.
The steeper glide path Fannie Mae economists now envision for mortgage rates is expected to translate into an additional $4 billion in refinancing volume this year and next when compared to last month’s forecast.
Refinance volumes are now expected to grow by 50 percent this year, to $372 billion, and by 46 percent next year, to $544 billion.
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