Economists at Fannie Mae have once again been forced to revise their forecast for 2022 home sales downward, saying affordability remains a “major constraint” for homebuyers despite the recent easing of mortgage rates.

“Housing remains clearly on the downtrend — and has been for several months now — due to the combined effects of outsized home price increases and the significant and rapid run-up in mortgage rates,” said Fannie Mae Chief Economist Doug Duncan, in a statement.

Home sales expected to fall 16.2 percent

Source: Fannie Mae Housing Forecast, August 2022

In projections released Monday, forecasters with Fannie Mae’s Economic and Strategic Research Group said they now expect 5.78 million homes to change hands this year. That would represent a 16.2 percent decline from a year ago — a steeper drop than the 15.6 percent pullback forecast in July.

“Despite a pullback in mortgage rates over the past month, recent incoming data point to a faster near-term slowdown in sales than we had expected, especially for new homes,” Fannie Mae forecasters said.

New homes sold at an annualized pace of 590,000 units in June — the lowest sales pace since the recovery following the initial COVID outbreak — prompting Fannie Mae forecasters to cut their outlook for 2022 new home sales to 632,000 units, down from 668,000 in last month’s forecast.

While new home sales are now projected to fall by 18 percent this year, existing home sales are also expected to fall by 16 percent this year to 5.143 million.

June existing home sales “were somewhat stronger than we had anticipated,” Fannie Mae forecasters said, but “recent leading indicators of July home sales such as pending sales and mortgage applications, point to a continued slow down.”

Pending sales, which lead closings by approximately 30-45 days on average, fell 8.6 percent from May to June.

In January, before this year’s big runup in mortgage rates, Fannie Mae economists were projecting that sales of existing homes would fall by just 3.2 percent this year, to 5.945 million — which would still have been the second-best year since 2006. Sales of new homes were projected to grow by 14.9 percent to 885,000, as builders were expected to put more homes under construction on the market.

Mortgage rates expected to ease

Source: Fannie Mae Housing Forecast, August 2022

Fannie Mae economists think mortgage rates have peaked and will trend downward into next year. In a July forecast, economists at the Mortgage Bankers Association predicted a similar, but less pronounced pullback in mortgage rates.

Doug Duncan

“The question for many market observers is how quickly, and with how much additional tightening, the core inflation rate will come down to the Fed’s preferred target,” Duncan said. “In our view, the labor market’s continued strength suggests that the Fed is likely to maintain its aggressive posture through the end of the year.”

Fannie Mae forecasters expect the Fed to “modestly slow its pace of tightening” by increasing the funds rate by 50 basis points instead of 75 at its next meeting in September and for the benchmark federal funds rate to peak at around 3.4 percent by the end of the year.

However, Fed Chairman Jerome Powell has said the Fed will be relying less heavily on policy guidance and be more data dependent going forward, meaning the risk of more aggressive tightening remains if inflation and job growth remain strong.

Nevertheless, Fannie Mae economists said they anticipate less pressure on long-term interest rates including mortgages, with a “modest recession” likely looming next year “as the labor market softens and the effects of tighter monetary policy are more acutely felt.”

Mortgage lending trending down 70 percent

Source: Fannie Mae Housing Forecast, August 2022

With the recent pullback in mortgage rates, Fannie Mae economists have raised their outlook for 2022 refinancing volume by $13 billion to $769 billion. That would still represent a 70.5 percent drop from a year ago — a drastic decline that’s prompted many mortgage lenders to lay off workers.

But because the recent pullback in rates hasn’t spurred homebuying, Fannie Mae economists have downgraded their expectations for 2022 purchase mortgage originations by $74 billion to $1.704 trillion. While that would be an 8.5 percent decline from a year ago, Fannie Mae forecasters expect purchase originations to drop by only 0.4 percent next year.

An ongoing constraint for home sales is the strong “lock-in” effect for existing homeowners who may be reluctant to sell because they don’t want to give up the low rate on their current mortgage.

“At 5.22 percent, we estimate 84 percent of outstanding mortgages are at least 100 basis points below current market rates,” Fannie Mae forecasters said.

Annual home price appreciation cooling

Source: Fannie Mae Housing Forecast, August 2022

Another constraint on home sales is affordability. While annual home price appreciation has slowed, prices aren’t decelerating as fast as Fannie Mae forecasters had expected at the beginning of the year.

In January, Fannie Mae economists projected that annual home price appreciation would drop into the single digits by the third quarter of 2022.

In their latest forecast, they don’t see that happening until the second quarter of 2023 when annual home price appreciation is expected to drop to 7.8 percent.

Although for-sale inventories are growing, the 3-months supply of existing homes on the market in June remained low by historical standards.

“We therefore expect overall for-sale inventories to remain tight for the foreseeable future, with some relief coming from the eventual completion of new homes as move-up buyers will vacate their existing units,” Fannie Mae forecasters said. “We expect the future completion of new homes will contribute to slowing house price growth and help with affordability.”

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Email Matt Carter

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