Low mortgage rates are helping rekindle homeowners’ motivation to refinance their loans, but a builder backlog, ongoing listings shortages and rising home prices are likely to prevent a similar stampede by homebuyers hoping to take advantage of the drop in rates.

That’s according to the latest forecast from Fannie Mae economists, who now project homes sales will grow by just 3.1 percent this year, down from the 3.8 percent annual growth predicted in July.

But because mortgage rates are expected to stay low for the rest of the year, Fannie Mae’s Economic and Strategic Research group now expects lenders will refinance $2.5 trillion in mortgages in 2021, a $143 billion increase from last month’s forecast.

A surge in COVID-19 cases driven by the Delta variant and slower than expected second quarter growth have helped bring rates down. And while Fannie Mae economists think the Federal Reserve may announce its intentions to taper its purchases of mortgage backed securities by the end of the year, they predict rates will rise only modestly next year.

Fannie Mae mortgage rate forecast

Average rates for 30-year fixed-rate loans by quarter. Rates after the second quarter of 2021 are projected. Source: Fannie Mae Economic and Housing Outlook, August 2021

Last month, Fannie Mae’s Economic and Strategic Research group was forecasting that rates on 30-year fixed rate loans would rise to 3.1 percent by the end of the year. Now they’re predicting that 30-year loans won’t broach the 3 percent mark until the third quarter of 2022.

But Fannie Mae economists have downgraded their forecast for home sales in the second half of 2021 — mainly because of the weaker outlook for new home sales, which fell 6.6 percent in June to an annual rate of 676,000 homes.

The drop could be a result of homebuilders turning down orders to give themselves time to catch up on construction backlogs. In their second quarter earnings calls, many builders “spoke of throttling back their order books in the face of supply disruptions, high materials costs, and labor scarcity,” Fannie Mae forecasters noted. “We expect sales to be subdued in the near term as this dynamic takes some time to play out, but eventually builders will work through their backlogs and start taking more orders.”

Projected home sales

Projected sales of new and existing homes. Sales for 2021 and 2022 are projected. Source: Fannie Mae Economic and Housing Outlook, August 2021

Fannie Mae economists now project 2021 new home sales will total 801,000, down from last month’s projection for 874,000 sales. Existing home sales are now projected at 5.86 million, a modest increase of 30,000 homes over July’s forecast.

“The past two months of declining mortgages rates would normally lead us to expect a greater increase in home sales over the latter half of the year, as rate changes typically induce more homebuying,” Fannie Mae’s economists said. “But the historically low level of inventory for sale suggests that any rate-related increase in sales will be muted due to the inadequacy of listings needed to fulfill higher buyer demand. This softer sales response also suggests more upward pressure on prices.”

Next year, new home sales are expected to rise to 871,000, as builders start catching up with demand. But while price appreciation is expected to cool, Fannie Mae also expects sales of existing homes to drop back to 2020 levels.

Projected mortgage originations, by loan type

Projected originations of mortgage refinancings and purchase loans. Source: Fannie Mae Economic and Housing Outlook, August 2021. 

Lower interest rates are expected to provide a boost in refinancings, with Fannie Mae analysts estimating that around 51 percent of all homeowners with mortgages could potentially lower their interest rate by at least 50 basis points, or half a percentage point. At the current forecast level of $2.5 trillion, refinancings won’t equal last year’s peak of $2.9 trillion, and are expected to drop by 47 percent next year, to $1.3 trillion.

Purchase loan originations are expected to grow by 12 percent this year, to $1.8 trillion, outpacing the projected 3.8 percent increase in home sales thanks to double-digit home price appreciation. Purchase loan volume is projected to grow by another 7 percent next year, to $2 trillion.

“While the recent surge of COVID-19 cases appears to be affecting consumer behavior, the economic response so far has been modest compared to last year’s outbreak, and its impact on our latest forecast is similarly slight, albeit to the downside,” said Fannie Mae Deputy Chief Economist Mark Palim, in a statement summarizing the forecast. “For the housing market, at current case levels, the lack of inventories of homes for sale and continued supply chain bottlenecks experienced by homebuilders remain the primary constraints on home purchase activity. Moreover, while mortgage rates have drifted downward and in theory provide greater purchasing power to potential borrowers, in practice, given current supply-side and affordability challenges, we expect that benefit to be limited.”

Email Matt Carter

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