The economy is improving, homebuyer demand remains strong and COVID-era restrictions are easing, but mortgage giants Fannie Mae and Freddie Mac each predicted a slowdown in the housing market as mortgage originations decrease in 2021. 

Fannie Mae revised its forecast down to predict mortgage originations will drop from 4.5 trillion in 2020 to just under 4 trillion this year and to just under 3 trillion in 2022. Freddie Mac’s forecast was even lower, stating that because higher mortgage rates have the potential to dampen the robust demand the housing market has been experiencing, it forecasts total originations to decline to $3.5 trillion in 2021. 

Fannie Mae stated that while housing demand remains strong, the ESR Group revised its annual home sales forecast slightly downward due to continued supply constraints and a modestly higher outlook for mortgage rates. Even so, it forecasted that much of the decline would result from refinances as it expects home sales and purchase mortgage originations in 2021 to rise 6.2 percent and 14.5 percent, respectively, year over year. 

Additionally, given the continued supply-demand imbalance, home prices are forecast to rise 8 percent in 2021 – up from the previously forecasted 4.2 percent – before decelerating to 2.9 percent annualized in 2022, as measured by the FHFA Home Price Index. 

Sam Khater | Photo credit: Freddie Mac

“As the economy continues to improve, we expect conditions to remain generally favorable for the housing and mortgage market,” Freddie Mac Chief Economist Sam Khater said. “Higher mortgage rates have the potential, however, to dampen the robust demand we’ve been experiencing, and we therefore forecast total originations to decline to $3.5 trillion in 2021.

He added, “Other important obstacles to consider include high home prices and low housing supply that will certainly influence the trajectory of purchase activity specifically.”

Freddie Mac predicts home prices will rise 6.6 percent in 2021, slowing to 4.4 percent in 2022, while it expects home sales to reach 7.1 million in 2021, falling to 6.7 million homes in 2022. Purchase originations are expected to increase to $1.7 trillion in 2021 before dropping to $1.6 trillion in 2022.

“The ramp-up we’d previously forecast for the economy is underway, as evidenced by, among other measures, increasing airline passenger reservations and restaurant bookings,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “Vaccinations are continuing to roll out, and consumers appear to be increasingly looking toward post-pandemic life.

“While inflationary pressure is growing, our latest forecast update suggests that in the near term interest rates will remain steady at borrower-friendly levels. In fact, despite the recent increases, mortgage rates remain near historical lows, which we expect will help maintain strong housing demand in 2021.

Doug Duncan | Photo credit: Fannie Mae

“An above-average pace of renters converting to first-time homebuyers is continuing, with many migrating into the suburbs from denser urban areas, Duncan said. “However, strong consumer demand for housing continues to hit up against a lack of supply, limiting sales and bolstering home prices, which we expect will further compound affordability concerns in the months ahead as homebuilders also wrestle with input supply restraints.”

Fannie Mae’s full-year 2021 real GDP growth expectations improved to 6.8 percent, including 9.1 percent annualized growth in the second quarter, due primarily to the continued easing of virus-related social restrictions and stimulus-driven consumer spending, according to the company Economic and Strategic Research Group’s April 2021 commentary.

Economic activity rebounded sharply following February’s weather-related pullback, and the acceleration is expected to continue through the second quarter before tapering in the second half of the year.

Of course, last year’s pandemic casts uncertainty into the forecast, and Fannie Mae disclosed that risks to the GDP growth section of its forecast remained elevated.

Uncertainties to the forecast include the extent of consumers’ willingness to tap into their accumulated savings and return to previously COVID-restricted activities; they also include well-publicized supply chain disruptions, the pace of inflation and both monetary and fiscal policy uncertainty.

Email Kelsey Ramírez

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