Economists at Fannie Mae expect an increase mortgage rates and home prices in 2022 due to higher inflation, a tightening of monetary policy, and low home inventory.
Fannie Mae in its October economic forecast said it expects the 30-year fixed rate mortgage to average 3.3% in 2022, up from 3.1% the GSE projected last month. Fannie attributed the uptick in interest rates to the Federal Reserve’s expected tapering of asset purchases, including mortgage backed securities.
For this year, Fannie projects rates to average 2.9%. According to the Freddie Mac PMMS survey, the average 30-year-fixed mortgage rose to 3.05% for the week ending Oct. 14, the highest level since April.
“Even a modest tightening of monetary policy would, of course, impact housing, but we expect the effects to be largely muted given current market conditions,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist.
In terms of home prices, economists at the GSE are forecasting a 16.6% increase in 2021, which is 1.8% higher than projected in September. In 2022, the economists changed the outlook on home price increases to 7.4% from 5.1%.
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Despite new single-family home construction being in high demand, supply has been hindered by the low availability of materials and skilled labor. Those obstacles will continue next year, the economists said.
According to the latest forecast, total home sales will decline to 6.54 million in 2022 from 6.77 million sales in 2021. Single-family mortgage origination projections for 2021 remained flat at about $4.3 trillion. Fannie Mae is now projecting single-family originations in 2022 at $3.30 trillion, up from September’s forecast of $3.25 trillion.
“Mortgage rates may rise in response to the tighter environment, but we expect the severe shortage of homes for sale to remain the primary driver of strong house price appreciation through at least 2022, limiting interest rate effects on home sales and home prices,” said Duncan.
Fannie Mae also slashed its forecast for the economy in 2021 for the third consecutive month. Real gross domestic product (GDP), Fannie said, is expected to grow 4.9% this year, compared to the 5.4% it had forecast in September.
Annual inflation for 2021 is expected to be 5.7%, higher than the 5.4% it projected in September. The main contribution will come from the higher energy prices, domestically and abroad.
The economists expect that the Federal Reserve will announce a tapering of asset purchases in its November meeting. Also, the central bank may hike the federal funds rate by 25 basis points in the fourth quarter of 2022, for the first time since December 2018.