Inflation is top concern amongst mortgage professionals, according to a November 2021 commentary from the Fannie Mae Economic and Strategic (ESR) Group. Recently, the ESR Group’s expectations for inflation increased meaningfully to average 6.2% on an annual basis in the fourth quarter. The ESR Group forecasted price gains to moderate within the next few quarters as temporary factors begin to wane, but they anticipate the build-up of even stronger inflationary pressure, suggesting that inflation will remain above the Federal Reserve’s 2% target through 2023.
The Fed is expected to begin hiking its target rate by 25-basis-point increments beginning in the fourth quarter of 2022. However, if inflation continues to exceed expectations, there is an increased risk The Fed will begin raising interest rates even earlier. The principle risks to the forecast are the pace of global supply recovery, the availability and cost of labor, and the extent of The Fed’s generosity.
"The Fed is in motion, pushed by inflation running ahead of their forecasts and looking less transitory than they had anticipated,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “They left themselves some room for policy change by committing to the speed of tapering assets for only two months, where adjustments could be made thereafter.”
For the first time, the ESR Group also published its expectations for 2023 gross domestic product (GDP) growth, which is projected at 2.1% — very much in line with pre-pandemic domestic growth trends. The forecasts expect that the primary drive for growth will be businesses restocking inventory and increased spending on services by consumers. Meanwhile, expectations for the full-year in 2021 and 2022 remained largely consistent with this month, with 2021 projects revised slightly downward 0.1% to 4.8% and 2022 projections revised slightly upward by the same amount to 3.7%.
"Economic growth continues to slow, but not precipitously; and as rates have not yet reacted strongly, housing and mortgage activity remain very strong,” Duncan continued. “Market participants will have one eye on the monthly inflation releases and the other eye on the Fed in the months ahead. How credible investors, business leaders, and consumers find the Federal Reserve's evolving beliefs regarding the passing or sustained level of inflation and resulting monetary policy actions will be key — their choices will impact economic growth as well as housing and mortgage activity.”
On housing market projections, the ESR Group forecasts for 2021 home sales were revised upwards while its projections for 2021 home construction slid slightly downwards. Although mortgage demand remains high, supply chain bottlenecks continue to strain homebuilding efforts as well as the lack of specialty trade labor. The ESR Group expects these constraints to ease in the coming months, allowing 4.8% growth in single-family home starts and 13.9% growth in new single-family home sales in 2022.
In regard to mortgage originations, the ESR Group expects purchase volume to total $1.9 trillion in 2021 followed by 6.8% growth in 2022 to $2 trillion. Refinance volumes are expected to hit $2.5 trillion by the end of 2021 before slowing in 2022 and 2023 to $1.3 trillion and $1.1 trillion, respectively. If The Fed begins raising interest rates later next year as expected, the ESR group forecasts the 30-year fixed mortgage rate will average 3.3% in 2022 and 3.5% in 2023.
