Fannie Mae’s Economic and Strategic Research (ESR) Group said on Friday that it expects a slower recovery of the U.S. housing market than previously forecast.
That’s because volatility in inflation readings and resilience in nonfarm payroll growth may provide the Federal Reserve confidence to cut benchmark rates only once in 2024.
“Unfortunately, we’re still not forecasting a ramp-up in housing activity, which will require some combination of continued household income growth, a further slowing of home price appreciation, or a decline in mortgage rates to bring affordability within range of many waiting first-time and move-up homebuyers,” Doug Duncan, Fannie Mae’s senior vice president and chief economist, said in a statement.
The ESR Group noted that listings of for-sale homes have risen as some homeowners are no longer willing to delay moving, likely due to a recalibration in mortgage rate expectations.
This has resulted in a better supply-and-demand balance in some regional markets, mainly concentrated in the Sun Belt, and is consistent with the group’s view of decelerating house price growth through the rest of the year.
But affordability constraints continue to limit the number of buyers in most markets. As a result, the ESR Group reduced its total U.S. home sales forecast to 4.82 million in 2024 (previously 4.89 million). The new forecast represents an increase of 1.3% compared to 2023 (previously 2.8%).
Due to the revision in home sales, the forecast for mortgage origination volume decreased slightly to $1.71 trillion in 2024 (previously $1.73 trillion). Refinance originations are expected to account for 22% of total volume in 2024.
According to the ESR Group, the 30-year fixed mortgage rate is expected to average 6.8% in 2024 and 6.4% in 2025.
The Fed is projected to cut rates only once this year, in December, as opposed to the previous forecast of two rate cuts.
“The economy appears to be slowing, and recent readings offer hope that inflation is cooling after progress on that front stalled in the first quarter — a trend that will likely need to be sustained for the Fed to feel comfortable cutting rates,” Duncan said. “Additionally, the labor market is showing signs of a gradual slowdown, with the unemployment rate creeping up to 4% in the June report.”
Annual inflation decreased to 3.3% in May and employers added 272,000 jobs last month. Amid mixed economic signals, the Fed maintained its short-term policy interest rate between 5.25% and 5.5% at its June meeting.
The ESR Group downgraded its forecast for real gross domestic product (GDP) growth to 1.6% year over year in the fourth quarter of 2024 (previously 1.8%), a result of slowing income and consumer spending growth, among other things.
