Fannie Mae’s Economic & Strategic Research Group’s (ESR) last outlook for 2023 indicated the housing market will begin its slow recovery in 2024. The group also noted the economy’s growth over the last year was better than what was expected in January.
While the market begins to look brighter, the research also showed it will continue to battle the same issues that kept sales low over the last several months such as affordability challenges, the lock-in mortgage effect, and low inventory. As a result, the market may see a slight downturn entering 2024 before improving, and the group cautioned the recovery will be slow-going.
“Last week’s comments by Chairman [Jerome] Powell, as well as the Federal Reserve’s updated summary of economic projections, suggest increased Fed confidence that a soft landing has been achieved and inflation is headed sustainably to 2 percent,” Fannie Mae Senior Vice President and Chief Economist Doug Duncan said in a release. “Clearly, the many economic forecasters who previously forecasted a recession beginning in 2023 were wrong, including us.
“However, we continue to think there are reasons for concern that will likely lead to a mild economic downturn, including stretched consumer spending relative to personal incomes and the continued effects of restrictive monetary policy still working through the economy,” he added. “Although we expect headline growth to clock in at 2.6 percent in 2023 – above what is generally considered to be the economy’s long-term growth potential of 1.8 percent – we’re also forecasting slightly negative growth in 2024.”
The ESR group stated its interest rate forecast for mortgages was lower for December, with the average 30-year fixed rate mortgage averaging 7.4 percent for the fourth quarter. Based on the current data, this rate should average around 6.7 percent in 2024 and 6.2 percent in 2025. It did note these numbers are likely to remain volatile as financial policy transitions from tightening to easing.
“Notwithstanding the recent mortgage rate rally, housing and mortgage markets will enter 2024 at approximately the same level as they entered 2023,” Duncan said. “Thus, while we think home sales will start to rise over the new year, the combination of modest increases in home prices and still-elevated interest rates suggest a slow pace of recovery from previously recessionary levels of housing activity.”
Existing home sales were below what the group had previously forecasted for October. At a seasonally adjusted annualized rate (SAAR) of 3.79 million, it was the lowest number of houses sold since 2010. That, combined with October’s pending sales numbers showing a weak performance, the ESR group revised its Q4 home sales estimate downward. However, it coupled this announcement by also revising its forecast for the beginning of 2024 modestly upward.
“We have upgraded our forecast for purchase mortgage origination volumes this month, consistent with upgrades to the home sales forecast,” the group stated. “We now expect 2024 purchase volumes to be $1.4 trillion, an upgrade of $29 billion and a 13 percent increase from 2023’s projected volumes of $1.3 trillion. In 2025, we expect purchase origination volumes to continue to grow, reaching $1.6 trillion.”
The number of anticipated refinances also got an upgrade, with the ESR group projecting $451 billion in refinance volume, $23 billion more than its previous forecast. In 2025, it expects refinance volume to hit $686 billion.