Fannie Mae's latest ESR Group commentary has downgraded its 2024-2025 home sales and mortgage origination forecasts, raised its 2024 GDP growth outlook, and cautioned about increased recession risks due to rising unemployment.
Despite a recent dip in mortgage rates, Fannie Mae's ESR Group forecasts in its August 2024 commentary that total home sales are expected to come in lower than previously anticipated through the rest of 2024, and then not pick up meaningfully until further out in 2025.
The ESR Group notes that home purchase demand remains weak, with mortgage applications and other indicators below last year's levels. Fannie Mae's Home Purchase Sentiment Index was also near a record low in July, revealing signs of consumers' frustrations.
The ESR Group downgraded its home sales forecast to 4.78 million in 2024 and 5.19 million in 2025, anticipating a recovery when and should income growth outpace home price growth and mortgage rates drop closer to 6%. New home sales are expected to show relative strength as current inventories are sold off, though new starts hit a four-year low in July as rising costs for builders hamper activity.
Additionally, the Group lowered its forecast for purchase mortgage originations in 2024 and 2025, despite anticipated lower borrowing costs. They now project 2024 purchase volume at $1.325 trillion, $31 billion less than July 2024's forecast, due to weaker home sales projections.
For 2025, the ESR Group expects a 15% increase to $1.518 trillion, which has also been revised downward from the previous forecast. Mortgage rates are forecasted to average 6.4% by the end of 2024 and 5.9% by the end of 2025, according to the Group's new predictions.
Meanwhile, due to a stronger-than-expected GDP reading in the second quarter, the ESR Group has revised its 2024 real GDP growth forecast upward, from 1.6% to 1.9%. However, a slowdown in growth is still expected given the historically low savings rate and the relatively weak July employment report, which showed the unemployment rate up six-tenths from the beginning of the year to 4.3%.
Labor market data was also sharply weaker in July as nonfarm payrolls increased by a modest 114,000.
The ESR Group still anticipates a soft landing as their base case, but acknowledges a higher risk of economic downturn due to the historical link between sharp unemployment rises and past business cycles.
"After absorbing recent economic data, bond market participants now appear to expect slower paths for economic growth and inflation, which contributed to a softening in mortgage rates over the last few weeks," said Fannie Mae Vice President and Deputy Chief Economist, Mark Palim. "On its face, the lower rate environment should be good for home sales by helping loosen the grip of the so-called 'lock-in effect,' in addition to aiding affordability more generally. However, high-frequency data, such as mortgage applications, home showing requests, and listing views, suggest that many potential homebuyers remain reluctant to make the jump."
Continued Palim, "Even with moderately lower mortgage rates, affordability remains close to historic lows due to the high level of home prices relative to incomes. We are therefore expecting continued sluggishness in home sales over the rest of the year. One bright spot for the mortgage industry has been the recent uptick in refinance applications, albeit from very low levels."
More forecast predictions from the ESR Group can be found here.
