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What a difference a month makes: Fannie Mae economists no longer expect mortgage rates to fall below 6% this year or next, arguing the “twin affordability constraints” of high home prices and mortgage rates will also This will prevent home sales in 2024 from reaching the previous level of the expected 5 million mark.
Last month, Fannie Mae’s eight-member forecasting team forecast that 30-year fixed-rate mortgage rates would fall to an average of 5.9% by the final three months of the year, with new and existing home sales totaling $5 million. set.
Fannie Mae Economic & Strategic Research (ESR) Group on Tuesday projected in its latest monthly housing forecast that mortgage rates will average 6.4% in the fourth quarter. While 4.91 million homes are expected to change hands this year, transactions will be driven primarily by households who can no longer put off moving due to life events.
Doug Duncan
“The housing market is likely to continue to face affordability constraints from high home prices and high interest rates through 2024,” Fannie Mae chief economist Doug Duncan said in a report. statement. “As market expectations for future monetary policy continue to evolve, higher-than-expected inflation data and strong employment data may put more upward pressure on mortgage rates this year than we previously forecast.”
Even with mortgage rates remaining high, sales of new and existing homes are expected to be stronger than last year, although the expected rebound isn’t as strong as Fannie Mae predicted last month.
“We believe an increasing number of transactions will be driven by households who can no longer put off moving simply because of the rate lock-in effect when they need to move due to life events,” Fannie Mae economists said. Comment Attached are their latest forecasts.
Home sales rebound expected to be weak in 2024
Source: Fannie Mae Housing Forecast, March 2024.
Sales of existing homes, which make up the bulk of most real estate agents’ business, are currently expected to grow just 3% to 4.21 million units by 2024. Existing home sales were about 47,000 units lower than the February forecast.
New home sales are expected to rise nearly 5% this year to 699,000 units, down 35,000 units from last month’s forecast of 734,000 new home sales in 2024.
Fannie Mae economists noted that “while existing sales rose 3.1% in January to an annualized rate of 4 million units, these increases reflect mortgage rates in November and December.” “To be Volume, which averages a month or two ahead of volume, fell 4.9% in January, indicating a potential pullback in February.”
Expectations for lower mortgage rates weaken
Source: Fannie Mae Housing Forecast, March 2024.
Last month, Fannie Mae forecasters predicted that 30-year fixed-rate mortgage rates would fall to 5.9% in the fourth quarter of 2024 and to 5.7% in the fourth quarter of 2025. The latest forecast is for interest rates to gradually drop to 6.0% by the fourth quarter of 2025.
“Strong headline employment data and higher-than-expected inflation data … led financial markets to price in a less aggressive path for interest rate cuts from the Fed,” Fannie Mae economists said in predicting less room for lower mortgage rates. idea.
Although economists at the Mortgage Bankers Association predicted in February that mortgage rates would fall to 5.5% in the fourth quarter of 2025, they did not release a March forecast on Tuesday.
This year’s rise in mortgage rates began with an unexpectedly strong jobs report on February 2, which dispelled speculation that the Federal Reserve might begin lowering the short-term federal funds rate in March.
Mortgage applications for home purchases fell for five straight weeks before mortgage rates began to slow again in early March. But since March 11, recent inflation data has once again pushed mortgage rates higher.
this CME Group Fed Watch ToolAn agency that tracks investors’ expectations of the Fed’s next move in the futures market said on Tuesday that the probability that the Fed would approve one or more interest rate cuts before June 12 was only 59.5%, down from 76.2% on February 16.
But for investors who fund most mortgages, what matters is not just when the Fed will start cutting short-term interest rates, but how much they are likely to be cut over the next two or three years.
“We believe the impact on the macro economy and mortgage rates whether the Fed begins cutting rates in June or later this year is likely to be minimal,” said Fannie Mae economists. “In contrast, we “Market expectations for cumulative changes in the federal funds rate over the next two to three years may have a more meaningful impact on mortgage rates.”
Unlike the short-term federal funds rate, the Fed has no direct control over mortgage rates, which are largely determined by investor demand for mortgage-backed securities (MBS).But already purchased Trillions of dollars in MBS and Treasury bonds To keep interest rates low during the pandemic, the Fed does have influence over the MBS market, which determines mortgage rates.
“Quantitative tightening” – the Fed’s ongoing plan to cut $35 billion in mortgage loans from its balance sheet each month – could prevent mortgage rates from falling significantly this year.
When Fed policymakers meet on Wednesday, they are expected to keep their short-term federal funds rate target at 5.25% to 5.50%. But Fannie Mae economists said bond market investors expected some discussion of quantitative tightening, which Fed Governor Christopher Waller said fell short of expectations.
Waller said in a speech on March 1 that he would like to see the Fed reduce its $2.4 trillion in mortgage holdings to zero. But because few homeowners have the incentive to refinance existing loans, the Fed has been unable to meet its goal of reducing its holdings of MBS by $35 billion a month.
Rather than actively selling mortgage-backed securities, the Fed passively rolled these investments off its balance sheet by not replacing maturing assets. But this strategy would only reduce the Fed’s MBS balance sheet by about $15 billion per month.
To reach its $35 billion monthly target, the Fed must start selling MBS. Even the threat of such a move could push mortgage rates higher, prompting real estate industry groups in October to plead with the Fed to publicly say it would not sell mortgages it purchased during the pandemic.
Refinancing expected to rebound from weak levels
Source: Fannie Mae Housing Forecast, March 2024.
With home prices expected to remain high, purchase-to-purchase mortgage originations are expected to rise 12% this year to $1.367 trillion, down $90 billion from last month’s forecast, before rising 13.5% to $1.551 trillion in 2025.
“We are lowering our forecasts for the source of purchases due to lower home sales forecasts, which in turn stem from a higher outlook for mortgage rates, and new data indicating a continued rise in the cash share of purchases,” Fannie Mae economists said. .”explain.
Refinancings this year are expected to rise 60% from last year’s weak levels to $397 billion, $62 billion less than the February forecast. Fannie Mae forecasts that refinancing amounts will increase another 58% next year, to $626 billion, as lower interest rates incentivize more homeowners to refinance.
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