Even though the economy is probably headed for a recession next year, the Fed is seen as having a ways to go before inflation is under control.

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With the Federal Reserve still struggling to get inflation under control, economists at Fannie Mae no longer expect mortgage rates to ease much next year, even with a “moderate recession” likely looming.

In their latest monthly forecast, Fannie Mae forecasters once again lowered their projections for 2022 and 2023 home sales, with mortgage rates recently hitting new 2022 highs on expectations of further Fed tightening.

Doug Duncan

“In our view, the recent interest rate surge is due to the market’s recognition of two critical factors: that inflation is indeed not transitory, and that, to tame it, the Federal Reserve will need to be resolute, even at the risk of possible recession,” Fannie Mae Chief Economist Doug Duncan said in a statement. “Inflation’s entrenchment – and the policy action likely required of the Fed – confirms the expectation in our forecast of a moderate recession beginning in the first quarter of 2023. That said, the rise in rates is having the Fed’s desired effect on housing, as house price growth began to slow in June.”

2022 home sales projected to fall 17.2%

Source: Fannie Mae Housing Forecast, September 2022

Last month, Fannie Mae economists were forecasting a 16.2 percent decline in 2022 total home sales. Now, with mortgage rates surging past 6 percent to the highest levels since 2008, they expect 5.71 million new and existing homes to change hands this year, which would represent a 17.2 percent drop from last year.

Next year, Fannie Mae is projecting sales of new and existing homes will fall another 12.8 percent to 4.98 million, down from August’s forecast of 2023 total home sales of 5.18 million.

The revision was driven mostly by lower expectations for new home sales, which are now expected to fall by 22.3 percent this year to 599,000 homes. That’s more drastic than the 16.5 percent projected drop in existing home sales, which are now expected to total 5.109 million this year.

Although new home inventories were at their highest level since 2009 in July, homebuilders “do not appear to be offering incentives sufficient to move growing inventories,” Fannie Mae analysts said. “However, many publicly traded homebuilders continued to report historically elevated gross margins through the second quarter, suggesting room for greater discounting in the future.”

Fannie Mae sees new home sales falling another 7.9 percent in 2023 to 552,000 and sales of existing homes dropping by 13.3 percent to 4.427 million.

Mortgage rates no longer projected to ease

Source: Fannie Mae Housing Forecast, September 2022

The most drastic change to Fannie Mae’s forecast from August is the projection of where mortgage rates could be headed next. Last month, Fannie Mae forecasters thought rates on 30-year fixed-rate mortgages had likely peaked during the second quarter at 5.2 percent and would retreat for five consecutive quarters to an average of 4.4 percent during the second half of 2023.

But in their latest forecast, Fannie Mae economists warn that even though the economy is probably headed for a recession next year, the Fed has a ways to go before inflation is under control.

Mortgage rates are now seen peaking at 5.7 percent during the last quarter of this year and the first quarter of 2023, with only a modest retreat to 5.5 percent by the final three months of next year.

In a Sept. 19 forecast, economists at the Mortgage Bankers Association remained slightly more optimistic, projecting that rates will peak at 5.5 percent in the second half of 2022 before returning to 5.0 percent by the end of next year.

Fannie Mae economists say they see a shift in inflation dynamics that will make it harder for the Fed to achieve a soft landing.

“While we believe headline inflation has likely peaked, strong rent growth and a tight labor market are leading to a more persistent inflationary trend, which historically has been difficult to contain without a general economic contraction,” Fannie Mae forecasters warned.

While energy costs have eased, inflationary pressures remain high, and the tight labor market “could lead to a difficult-to-reverse wage-price spiral dynamic.”

From the Fed’s “theoretical viewpoint,” unemployment would have to rise from 3.7 percent to above 4.5 percent for labor market inflationary pressures to decelerate, Fannie Mae economists said.

“Even considering Fed rate hikes to date, the current policy stance is still, arguably, near neutral, meaning a rate that is neither stimulative nor contractionary to economic activity,” Fannie Mae economists said. “We believe market expectations are beginning to take further into account the possibility that the Fed will have to raise its short-term rate well above neutral and perhaps maintain it for some time in order to induce sufficient labor market softening to achieve price stability.”

Mortgage refinancings trending down 72.6% this year

Source: Fannie Mae Housing Forecast, September 2022

Fannie Mae’s latest forecast includes a “minor upward revision” of $101 billion to estimated 2021 mortgage originations as a result of annual benchmarking to Home Mortgage Disclosure Act (HMDA) data.

At $1.706 trillion, Fannie Mae’s forecast for 2022 purchase mortgage volume remains essentially unchanged from August, thanks in part to continued home price appreciation. That would represent a 10.2 percent drop from a year ago. Purchase loan volume is expected to fall by another 1.5 percent in 2023 to $1.681 trillion.

But higher mortgage rates have significantly lowered the expected market size for 2022 and 2023 refinancing. Fannie Mae now projects mortgage lenders will refinance $731 billion in mortgages this year, $38 billion less than forecast in August. That would represent a 72.6 percent drop from a year ago.

Fannie Mae projects refinance volume will drop by another 33 percent next year to $490 billion, down $102 billion from last month’s forecast.

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Email Matt Carter


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