Economists at Fannie Mae project national home prices to decline by 1.5 percent and home sales by 21 percent in 2023 as Fed continues inflation fight.

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In their most pessimistic forecast of the year to date, economists at Fannie Mae say they now expect national home prices to decline by 1.5 percent in 2023, with home sales predicted to fall by 21 percent as Federal Reserve policymakers continue to struggle to get inflation under control.

“Over the last few weeks, markets have increasingly — and perhaps reluctantly — reflected the resolve of the Fed to lower inflation via rapid tightening of monetary policy,” said Fannie Mae Chief Economist Doug Duncan in a statement Wednesday. “At times, the market has reacted to incoming economic data suggesting the Fed is making progress in its fight with inflation by anticipating a potential policy ‘pivot’ toward a less restrictive regimen, prompting the Fed to restate its resolve. Of course, the slowing effect on the housing market of the higher mortgage rate environment has been largely predictable, and home prices appear to have already begun trending downward.”

Falling home prices and home sales aren’t expected to generate the kind of shock to the financial system that produced the Great Recession of 2007-09, since most homeowners aren’t in danger of losing their homes as interest rates rise.

Doug Duncan

“While affordability measures are very stretched and median home prices are well-deviated from their historical relationship to typical household incomes, we do not anticipate that home price declines will result in a repeat of the Great Financial Crisis,” Fannie Mae economists said in commentary accompanying the latest forecast. “Due to the minimal use of adjustable-rate mortgages (ARMs), teaser rates and exotic mortgage products, relatively few current single-family borrowers are subject to payment shocks from rising interest rates in the way many borrowers were in 2006-2008.”

National home prices projected to fall

Source: Fannie Mae Housing Forecast, October 2022

“Looking ahead to the full year 2023, on a national basis, we expect an average home price decline of 1.5 percent,” Duncan said. “Given the ongoing tension between potential homebuyers and home-sellers at the moment, we believe the pace of sales is likely to slow even further, too.”

While Fannie Mae’s housing forecasts have gradually become more pessimistic each month this year, home price appreciation projections are only updated quarterly. This month’s forecast represents the first time forecasters at the mortgage giant have predicted 2023 home price declines.

In a Feb. 10 forecast, Fannie Mae economists envisioned annual home price appreciation would cool to the single digits in the second half of 2022 and gradually fall to 3.3 percent by the final quarter of 2023.

That was before the Fed started raising short-term interest rates at breakneck speed as tight labor markets and soaring energy prices, driven by Russia’s Feb. 24 invasion of Ukraine, stymied the Fed’s efforts to curb inflation.

Beginning March 17, the Fed has raised short-term interest rates five times this year including three consecutive 75-basis point increases to the federal funds rate. Fed policymakers are expected to implement another 75-basis point increase on Nov. 2.

With mortgage rates more than doubling in the past year — exceeding 7 percent by one measure — many homebuyers have been priced out as home prices continued to rise.

In their latest forecast, Fannie Mae economists expect national home price appreciation will still average 9 percent during the last three months of the year before plummeting into negative territory by the second half of next year.

“With mortgage rates resuming their rise following a mid-summer pull back (at 6.66 percent as of this writing according to the most recent Freddie Mac survey), resulting in rapidly diminishing home purchase demand, we expect home prices to continue to decline in the near term,” Fannie Mae economists said. “As measured by the Fannie Mae Home Price Index, we have revised downward our home price growth forecast for 2022 and 2023 from 16.0 percent and 4.4 percent, respectively, to 9.0 percent and negative 1.5 percent.”

While not all markets will see home prices fall, prices in particularly unaffordable markets could see price declines exceeding the national average.

Fannie Mae’s latest monthly National Housing Survey found homebuyer sentiment fell in September for the seventh month in a row to levels not seen since 2011, and that a growing number of homeowners and renters expect home prices to decline over the next 12 months.

Home sales projected to fall 21 percent next year

Source: Fannie Mae Housing Forecast, October 2022

In its February forecast — published two weeks before Russia’s invasion of Ukraine — Fannie Mae predicted a 2.4 percent drop in 2022 home sales, followed by a further 3.5 percent decline next year to 6.487 million homes.

The latest forecast envisions an 18 percent drop in 2022 homes sales to 5.641 million and another 21 percent drop next year to 4.47 million.

“Beyond diminished affordability, as mortgage rates continue to rise, we suspect the ‘lock in’ effect, in which existing mortgage borrowers have rates well below current market rates, is limiting the number of move-up buyers,” Fannie Mae economists said. “While total inventories of homes for sale are continuing to drift upward, this is largely due to a slowing pace of sales. According to Realtor.com, September new listings were down 9.8 percent from a year earlier. The combination of diminished affordability and the large financial disincentive for existing homeowners to take out a new mortgage at current market rates will likely continue to weigh on the pace of sales.”

Mortgage rates still expected to ease next year

Source: Fannie Mae Housing Forecast, October 2022

Fannie Mae economists expect mortgage rates to ease to 6.2 percent by the end of next year but not before hitting a higher-than-previously forecast peak of 6.7 percent during the final three months of 2022. Last month, Fannie Mae economists said they expected mortgage rates to top out at 5.7 percent during the last quarter of this year and the first quarter of 2023.

While futures markets are pricing in the likelihood of another 75-basis point Fed rate hike in November, Fannie Mae forecasters think financial instability could eventually lead the Fed to put the brakes on short-term interest rate hikes.

“As global monetary policy continues to tighten, there is a growing risk that a weak point in the global financial system could buckle under the pressure of a higher rate environment,” Fannie Mae economists noted. “The related strengthening in the dollar exchange rate may also create pressure on foreign entities owing dollar-denominated liabilities. Historically, periods of rapid dollar appreciation have coincided with developing market financial crises, such as the Mexican Peso Crisis and the Asian Financial Crisis. We cannot predict if such events may occur, let alone when. The turmoil in the UK bond market in recent weeks is a reminder that market liquidity cannot be taken for granted, especially when central banks are tightening.”

Purchase lending expected to shrink by 18% next year

Source: Fannie Mae Housing Forecast, October 2022

Even if mortgage rates do ease next year, recent trends in mortgage applications — along with expectations that home sales and prices will fall next year — mean 2023 could be even tougher for mortgage lenders than previously forecast.

Fannie Mae forecasters now expect purchase loan originations will shrink by 18 percent next year to $1.343 trillion, down $338 billion from last month’s forecast.

Refinancings are expected to drop by 44 percent in 2023, to $392 billion, down $98 billion from last month’s forecast. That’s on top of a projected drop of 74 percent this year.

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Email Matt Carter

homebuying | lenders
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