Starting this year, the housing market is expected to settle into a “new normal” according to the January 2022 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. As unprecedented market disruptions and policy responses from the Covid-19 pandemic subside, inflation is expected to remain elevated in 2022, although it is still uncertain whether these structural shifts in the economy and housing markets will become permanent.
"We expect economic growth to continue slowing as the impacts of fiscal stimulus fade and the country's attention increasingly turns to rising inflation," said Doug Duncan, Fannie Mae senior vice president and chief economist.
Overall, the ESR group foresees economic growth returning to modest levels consistent with the long-run trend, while home sales and price growth return to a more sustainable pace. Home price appreciation is expected to clock in at a still-brisk 7.6% in 2022, as measured by the FHFA Purchase-Only Index, but down greatly from 2021’s expected 17.3%. Meanwhile, expectations for headline economic growth remained largely unchanged.
The ESR group expects 5.5% GDP growth in 2021, which would represent the largest annual GDP growth since 1984. In 2022, they expect 3.1% GDP growth, a downgrade of only one-tenth.
Inflation and supply chain disruptions are still key risks for the economy this year, as are the Federal Reserve’s policy responses and the financial market’s overall response. For now, the ESR group projects inflation to average 7% on an annual basis in the first quarter before slowing to a still-elevated 4% by the end of the year.
Now that the unemployment rate is dipping below 4%, the Federal Reserve is poised to begin policy tightening. The ESR group expects The Fed to hike up interest rates 3 times in 2022 – the first of which will occur in March.
"The Fed has accelerated the pace at which it intends to reduce monetary accommodation, as inflation appears more resilient than initially expected,” Duncan continued. “Currently, we expect inflation to run above the Fed's two-percent target through 2023, and for the Fed to respond by tightening over that period. The resultant rise in interest rates will likely put additional stress on housing affordability measures vis-à-vis higher mortgage rates for consumers and the continued, though decelerating, rise in home prices. While consumers still have a significantly elevated level of savings, the rate of saving has fallen such that, over time, we believe 'excess' saving will likely be eroded and affordability increasingly constrained. We observe an early indication of this in recent increases in debt-to-income measures associated with incoming mortgage originations.”
The Fannie Mae ESR report concludes that the Omicron Covid-19 surge will only have a modest, temporary impact on the economy. Due to the fact this variant is less severe than prior waves, high frequency economic indicators suggest only a small change in consumer behavior compared to the 2020-21 winter waves of Covid-19.
Because of the sheer volume of cases, the impact is more likely to be felt on the supply side of the economy, leading to a higher number of employees calling out sick or needing to quarantine. The delay in supply side improvements may put additional upward pressure on inflation. Yet, based on the trajectory of cases, Fannie Mae researchers expect his wave will pass in the coming weeks.
