The Economic and Strategic Research (ESR) Group at Fannie Mae predicts that single-family home sales, which appeared to have reached their lowest point in Q4 2023, are set to initiate a gradual but meaningful revival in the coming year. This resurgence aligns with an upward trend in mortgage origination activity, attributed to a recent pullback in mortgage rates.
According to the ESR Group's December 2023 commentary, purchase mortgage applications have rebounded by approximately 15% from their November trough. The ESR Group anticipates this trend will persist if mortgage rates continue to decline. Nevertheless, persistent factors such as affordability challenges, the lock-in effect, and a shortage of available homes for sale—key contributors to the lowest home sales levels since the Great Financial Crisis in 2023—are likely to persist into 2024.
Consequently, the ESR Group foresees a substantial yet gradual recovery in home sales.
Additionally, the ESR Group maintains its forecast of a minor downturn in 2024, followed by a return to growth in 2025. It underscores that several underlying business cycle dynamics that contributed to the previous year's recession continue to exist. While the likelihood of achieving a soft landing has improved in recent months, navigating this outcome without a resurgence in inflation poses a formidable challenge.
“Last week’s comments by Chairman Powell, as well as the Federal Reserve’s updated Summary of Economic Projections, suggest increased Fed confidence that a soft landing has been achieved and inflation is headed sustainably to two percent,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan. “Clearly, the many economic forecasters who previously forecasted a recession beginning in 2023 were wrong, including us."
But he said there are still reasons for concern, citing "stretched consumer spending relative to personal incomes and the continued effects of restrictive monetary policy still working through the economy."
He estimates "headline growth to clock in at 2.6 percent in 2023 – above what is generally considered to be the economy’s long-term growth potential of 1.8 percent – we’re also forecasting slightly negative growth in 2024.”
Duncan added: “Notwithstanding the recent mortgage rate rally, housing and mortgage markets will enter 2024 at approximately the same level as they entered 2023. Thus, while we think home sales will start to rise over the new year, the combination of modest increases in home prices and still-elevated interest rates suggest a slow pace of recovery from previously recessionary levels of housing activity.”
