Fannie Mae Revises Housing Market Forecast Amid Persistent Challenges

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Fannie Mae’s Economic and Strategic Research (ESR) Group has adjusted its forecast, anticipating a slower U.S. housing market recovery than expected. This change is primarily due to ongoing volatility in inflation readings and robust nonfarm payroll growth, which may lead the Federal Reserve to cut benchmark rates only once in 2024, rather than the two cuts previously predicted.

Housing Market Dynamics

According to Doug Duncan, Fannie Mae’s senior vice president and chief economist, the ESR Group is not forecasting a significant increase in housing activity in the near term. This is due to the need for a combination of continued household income growth, a further slowdown in home price appreciation, and a decline in mortgage rates to improve affordability for first-time and move-up homebuyers.

The market has seen an increase in the listings of for-sale homes, as some homeowners adjust their expectations regarding mortgage rates and decide to proceed with moving. This has resulted in an improved supply-and-demand balance in certain regional markets, particularly in the Sun Belt, which aligns with the ESR Group’s expectations for decelerating house price growth through the remainder of the year.

However, affordability constraints continue to pose a significant barrier, limiting the number of potential buyers in many markets. Consequently, the ESR Group has reduced its total U.S. home sales forecast for 2024 to 4.82 million, down from the previously forecasted 4.89 million. This revised figure still represents a modest 1.3% increase compared to 2023, but it is lower than the initially anticipated 2.8% growth (National Housing Conference)​.

Inventory and Price Trends

Housing inventory has been rising, with a significant year-over-year increase. As of mid-2024, the housing inventory is up 37.3% compared to the previous year, which translates to approximately 621,000 homes on the market: While the locked-in effect is still a major factor in this market, an unwillingness of homeowners to sell because their current mortgage is much better than any new one they could get, some homeowners have lost hope that mortgage rates will drop significantly and have decided that they can’t delay moving any longer. Despite increased inventory, the market remains below pre-pandemic levels, and the pace of growth has recently slowed (Calculated Risk)​.

Furthermore, a comparison of AVM values with listing prices suggests that a significant portion of the inventory growth we have seen is illusory. People locked into a low interest rate are testing the waters by listing their properties at unrealistically high prices, i.e. at rates that would pay off their existing mortgage and allow them to buy another home with the remaining cash.  Realtors who normally would refuse to entertain such unrealistic listings are willing to play along because they are starved for clients. We plan to do a more in-depth article on this phenomenon next month.

Home prices have continued to rise, but the rate of increase has moderated. Nationally, home prices rose by 5.1% year-over-year in May 2024, a decline from the higher rates seen in the previous year. This trend of decelerating price growth is expected to continue, influenced by the growing inventory and higher mortgage rates, which have impacted affordability​ (Redfin)​.

Economic and Policy Outlook

The ESR Group projects that the average 30-year fixed mortgage rate will be around 6.8% in 2024 and 6.4% in 2025. The Federal Reserve is expected to make only one rate cut in December 2024, a revision from the previously anticipated two cuts. This cautious approach is due to mixed economic signals, including a slight cooling in inflation and a gradual slowdown in the labor market, with the unemployment rate inching up to 4%​.

The ESR Group has also downgraded its forecast for real gross domestic product (GDP) growth to 1.6% year-over-year in the fourth quarter of 2024, down from 1.8%. This adjustment reflects slower income and consumer spending growth, among other factors, which continue to pose challenges to the broader economic recovery​ (National Housing Conference)​​ (Redfin)​.

In summary, while the housing market shows signs of increased inventory and moderating price growth, affordability issues and economic uncertainties remain significant hurdles. The revised forecasts from Fannie Mae and supporting data from the MLS highlight the complexity of the current housing and economic landscape.

John Pusa
Glendale, CA

Hello Kukun--240-483-3649 Franklin Carroll very helpful report about Fannie Mea revises housing market forecast.

Jun 24, 2024 08:19 PM