Fannie alters 2021 forecast due to housing market shortage
By Alex Roha
A full month of sub-3% mortgage rates, ongoing housing market supply constraints, and a 300% increase in lumber prices over the past 15 months has prompted Fannie Mae‘s Economic and Strategic Group to revise several of its 2021 forecasts.
March’s existing home sales report perfectly illustrated the country’s core housing market issues – a decade of under-building led to a 3.7% decline in transactions from the prior month, even though there’s never been more demand for a home.
“We have long expected that a combination of waning COVID-19-induced movement into single-family housing and continued tight inventories would lead to a slowing pace of existing home sales as the year progresses,” the ESR group said. “However, the latter factor appears increasingly more limiting.”
Record-high home prices ticket up in every region of the country. And there’s not much hope for immediate help. Homebuilders face their own supply constraints, most notably the price of lumber and other materials, as well as a lack of buildable lots and difficulties hiring subcontractors, the ESR group noted.
At the end of March, even with a slower sales pace, a near record low of just 2.1 months of housing market supply sat ready on the market. Fannie Mae revised its single-family housing starts to increase 24.8% in 2021 compared to 2020, but has yet to take into account the 13.4% drop in April.
“While the limited supply of homes available for sale continued to drag on sales, the month’s decline was in part driven by the cold weather and related power outages a month earlier on account existing sales are measured at the point of closing, which typically occurs 30-45 days after signing,” the ESR group said. “While the decline was expected, recent data suggest that the forecast rebound in April sales will be smaller than we had previously anticipated.”
Fannie Mae modestly revised its real GDP expectations upward to 7% from 6.8%, primarily because consumer spending picked up as the economy reopened. The GSE expects a slow but positive unemployment recovery that will incentivize more potential homeowners to take advantage of still-low mortgage rates. That could boost the housing market.
Since rates have fallen back below 3%, Fannie Mae revised its expectations for purchase and refinance volume. The economic group cut $43 billion from its 2021 purchase volume forecast; it now estimates that purchase mortgages will hit $1.8 trillion by year’s end.
Because record low mortgage rates fueled the housing market’s refinance wave of 2020, Fannie Mae also revised its refi origination volume to $2.2 trillion in 2021, an increase of $125 billion from last month’s forecast.
“We expect refinance volume in 2022 to total $1.1 trillion, an upward revision of $43 billion from last month’s forecast, but a decline of 49% from 2021,” said the ESR group. “At current interest rates, we estimate around 51% of all outstanding mortgages have at least a 50-basis point incentive to refinance, up from 42% in last month’s forecast given the recent rate declines.”
Typical economic indicators such as the 10-year yield haven’t had as much of an impact on mortgage rates in recent weeks as they typically would. Most likely as investors are keeping a close watch over Fed inflation policies and the rest of the world’s global recovery rate from COVID.
Doug Duncan, Fannie Mae’s chief economist, said to closely watch for stronger inflation and a resultant move in interest rates. As the effects of expansionary monetary policy continue to work their way through the economy, inflationary expectations may continue to rise.
“This could lead to prices rising further even with growth concurrently slowing in the presence of diminished labor market slack and waning fiscal policy support,” Duncan said. “If such a scenario were to play out, the question then becomes whether this necessitates a response by the Federal Reserve. While momentum in the housing market will likely continue in the near term, this is an increasingly important consideration for 2022.”