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Housing activity to remain limited by mortgage rates, home prices: Fannie Mae

Total home sales are forecasted to decline to 4.52M units, single-family mortgage origination to post $1.64T in 2023: Fannie Mae economists

Homebuilder confidence and demand for mortgages have increased recently, keeping hopes high for an improved housing market in 2023. But a modest recession is still expected this year, and elevated mortgage rates, coupled with high home prices, will limit housing activity, according to Fannie Mae.

Fannie Mae expects total home sales in 2023 to be 4.52 million units, declining from its final estimate of total sales in 2022 and marking the slowest annual pace since 2010, according to its Economic and Strategic Research Group. 

“We project that the combination of declining home prices, lower mortgage rates, and, with time, growing household incomes, will eventually place the housing market in a recovery,” Fannie Mae’s ESR Group said. “However, we believe this process is likely to take multiple years.”

Economists at Fannie downgraded its home price growth to a decline of 4.2% in 2023 on a Q4/Q4 basis, followed by an additional drop of 2.3% in 2024. Prices are expected to fall 6.7% over the next two years.

Inventory remains tight, and the overall housing stock is well below what long-run demographic trends suggest is needed, according to the group. 

In return, first-time home buyers are turning to new homes, as existing homeowners are disincentivized to list their homes for sale and move due to “lock-in” effects. Homeowners who purchased at historically low rates are hesitant to put their home on the market, sell, and take on a new, higher mortgage rate. Thus, the new home sales market is expected to be buoyed by first-time buyers this year, Fannie Mae said. 

About 770,000 single-family homes were under construction as of November 2022, and builders are expected to offer incentives, such as buying down points on buyers’ mortgages, to bolster sales of units as needed. 

Fannie Mae forecasts new home sales to decline in 2023 to 570,000 annualized units, down 12.7% from 2022 levels, but still representing a new home sales pace that is modestly below the pre-pandemic norms.

In 2023, the overall single-family mortgage originations are forecast to be $1.64 trillion, contracting further from an estimated $2.34 trillion from the previous year.

The group expects a rebound in 2024 to follow, with total sales rising 12.8% to 5.1 million units, and origination volume rising to $1.97 trillion on the back of the economic recovery. 

“We continue to expect a modest recession to begin during the first half of the year and are forecasting Q4/Q4 GDP growth for 2023 to be negative 0.6 percent, a tick down from our previous forecast,” Fannie Mae’s ESR Group said.

However, there are also signs that a ‘soft landing’ may be in the offing, according to Doug Duncan, senior vice president and chief economist at Fannie Mae.

With the market expecting the Federal Reserve to ease its monetary policy in the second half of the year, there are two likely scenarios: a view that the recession is forthcoming, or that the slowdown in inflation will lead to a less restrictive monetary posture.

If the slowdown in inflation leads to a less restrictive monetary posture, the lower accompanying rates will likely set the stage for a pickup in housing activity going into 2024.

“However, if the market is wrong – and the Federal Reserve does as it has stated it will do and holds the federal funds target at the terminal rate longer to ensure no inflation resurgence – then the accompanying rate decline and associated revival in housing activity will likely be delayed. In either case, we expect 2023 to be a slow year for the housing market,” Duncan said.

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