Housing activity is expected to slow modestly compared to previous projections, if the broad upward movement in mortgage rates since the start of the year is sustained, per the May 2024 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group. Its May forecast maintains the previous outlook for Q4/Q4 real Gross Domestic Product (GDP) growth of 1.8% in 2024 and 1.9% in 2025.
The ESR Group noted upside risk to its latest forecasts for housing starts, single-family mortgage originations and home sales activity, particularly if upcoming data releases lead market participants to believe that the Federal Reserve is closer to easing monetary policy, which would likely push mortgage rates downward.
The ESR Group forecasts overall economic growth to slow and mortgage rates to end the year near 7%. As a result, they expect a slowdown in housing activity through 2024 compared to their previous forecast. However, with active home sale listings now up approximately 30% compared to a year ago, the ESR Group believes sizable declines in home sales are unlikely and continues to forecast a modest upward drift in existing home sales over the forecast horizon, particularly compared to the historically low sales levels of the previous two years.
Combined with potential softening in payroll employment growth, the ESR Group expects inflation to decelerate through 2024 but remain sticky enough in the near term to prevent a Federal Reserve rate hike until September. "We also continue to expect the Federal Reserve to
implement the first of two rate cuts this year in September as inflation measures moderate, gradually trending toward the Fed’s 2% target. However, we believe the Fed is likely to remain cautious as there are still signs that inflation may remain stickier than anticipated," the report read.
"The question our economics team is asked most frequently by industry participants remains where we think mortgage rates are headed," said Fannie Mae's Senior Vice President and Chief Economist, Doug Duncan. "For now, we see rates remaining closer to seven percent through the end of the year – before trending downward in 2025 – but note potential downside to that forecast given recent actual movements in rates. Our consumer survey suggests that households who are paying attention to the housing market continue to take a wait-and-see approach. This is consistent with our latest housing forecast, which does not foresee a dramatic change in activity until affordability improves. Given ongoing supply constraints and recent indications that the labor market may be weakening, a downward movement in mortgage rates appears to be the likeliest lever to achieve an improvement in affordability."
Existing home sales fell back 4.3% in March to an annualized pace of 4.19 million, in line with the group's expectations. The group previously noted that the pace of starts has been elevated relative to the new home sales pace in recent months. Single-family starts fell in March by 8.7%, followed by a 0.4% decline in April, while new sales rose 8.8% in March.
The full report can be read here.
