Higher mortgage rates are currently “a major constraint on the housing market,” Fannie Mae economists said in a new forecast that home sales will fall 13.5% this year.

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Higher mortgage rates “are currently the main constraint on the housing market,” Fannie Mae economists said in a new forecast that home sales will fall 13.5% this year and that the Federal Reserve’s increasingly aggressive efforts to fight with inflation “is likely to lead to a recession. ” next year.

latest forecast from the Fannie Mae Economic and Policy Research Group, published on Thursday, paints a bleaker picture than the May forecast, which suggested an 11.1% drop in home sales in 2022. In January, Fannie Mae forecasters predicted that while rising mortgage rates and home prices would send many homebuyers out of the market, home sales would decline by just 1.2 percent in 2022.

What has changed are expectations about how much and how quickly the Fed will have to raise short-term interest rates to fight inflation. On Wednesday, Fed policymakers approved the biggest interest rate hike in 28 years, following Friday’s Labor Department report that showed inflation hit 8.6% in May, the highest in more than 40 years.

Doug Duncan | Photo Credit: Fannie Mae

“We continue to believe that the measures needed to tighten monetary and fiscal policy to bring inflation back to the Federal Reserve’s target are likely to lead to a recession, which we currently expect to be moderate and occur next year,” said Doug, chief economist at Fannie Mae. Duncan said in statement. “Notably, the recent market reaction to continued elevated inflation suggests that the projected recession could come earlier and be deeper than our current baseline forecast.”

Home sales are forecast to fall by 13.5% this year and another 11.2% in 2023.

Source: Fannie Mae Housing Forecast June 2022.

Recent weaker-than-expected data on new home sales and mortgage applications prompted Fannie Mae economists to revise their 2022 home sales forecast downward to 5.96 million units, down 13.5% from 2021. The latest forecast assumes a drop in home sales. up another 11.2 percent in 2023, to 5.29 million units, up from a May forecast of 5.42 million sales.

Based on the latest data on home sales and mortgages, Fannie Mae economists revised down their sales forecasts for both new and existing homes.
While April’s 2.4% drop in existing home sales was in line with expectations, “recent data on incoming mortgage applications point to a faster-than-expected further decline” in the third quarter, Fannie Mae economists said in comment accompanying their latest forecast.

New home sales were “well below expectations”, falling 16.6% in April to the slowest pace since closing in 2020 due to COVID-19. But Fannie Mae economists said they were “partially ignorant of the magnitude of the fall” in new home sales, suspecting that many developers were “caught off guard by the extent of the mortgage rate hike this spring and the resulting decline in the number of homebuyers waiting to enter the market.” . lists. The number of new homes available for sale continues to rise while a record number of homes are currently under construction.”

The forecast was completed on June 10, before the last Fed rate hike, meaning next month’s forecast could include additional downward revisions.

“The recent hike in interest rates after the completion of our rate forecast indicates further downside risk to our already downwardly revised sales forecast,” Fannie Mae economists said in a note.

Mortgage refinancing is expected to fall by 69% this year.

Source: Fannie Mae Housing Forecast June 2022.

With expected lower home sales, economist Fannie Mae lowered its 2022 mortgage projection to $2.61 trillion (previously $2.70 trillion) and to $2.20 trillion in 2023 (previously $2.70 trillion). .25 trillion dollars).

Much of this drop is because higher mortgage rates mean fewer homeowners have an incentive to refinance. Fannie Mae predicts that only 2 percent of outstanding mortgages have a refinance incentive of at least 50 basis points, and refinancing will fall 69 percent this year to $797 billion and another 35 percent in 2023 to $518 billion dollars.

Thanks in part to rising house prices, lending to buy is projected to decline by a more modest 3 percent this year to $1.808 trillion, and another 6.7 percent in 2023 to $1.686 trillion. But rising house prices and mortgage rates are expected to limit homebuyer demand.

“A significant, sudden rise in interest rates is beginning to be widely felt as employment growth slows and stock market prices fall,” Duncan said. “Nowhere is this more evident than in housing affordability measures, when the expected monthly payment on a typical new mortgage rises sharply. As a result, sales of both new and existing homes continue to slow down, while refinancing activity has fallen substantially and what remains is largely capital raising.”

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