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This year’s existing home sales are shaping up to be the worst year since 1995, and given the recent spike in mortgage rates, economists say that if many prospective sellers continue to make their mortgage payments, next year’s sales will decline. We don’t think the recovery will be as convincing as previous predictions. There are fewer affordable options for side traders and buyers.
Economists at Fannie Mae and the Mortgage Bankers Association released forecasts Thursday that include significant downward revisions to home sales forecasts and a more cautious outlook on the prospects for lower mortgage rates in the near term.
With interest rates expected to remain well above 6% next year, economists say many would-be sellers may continue to feel locked into low interest rates on their existing mortgages. A lack of inventory for sale is likely to continue to support prices that have soared in many markets during the pandemic, further exacerbating affordability challenges for homebuyers.
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“Long-term interest rates have risen over the past two months following a continuation of a series of strong economic indicators and disappointing inflation data,” Mark Parim, Fannie Mae’s chief economist, said in a statement.
Parim said the rise in interest rates was driven by bond market investors’ expectations for stronger economic growth, which could bode well for the labor market and homebuyer demand.
mark parim
“However, we expect the inventory of homes added to the market, and therefore sales of existing homes, to remain subdued into next year, as the rising mortgage rate environment is likely to strengthen the continued lock-in effect. ,” Palim said. “How these competing forces will be balanced is currently an open question, but for now we believe that affordability will continue to be the primary constraint on housing activity throughout the forecast period. I expect it to continue.”
The 30-year fixed rate conforming mortgage rate has risen to 6.85% as of Wednesday since hitting a 2024 low of 6.03% on Sept. 17, according to Rate Lock data tracked by Optimal Blue. .
Interest rates are expected to fall gradually
Source: Fannie Mae and Mortgage Bankers Association November 2024 forecast.
Fannie Mae economists last month predicted that 30-year fixed-rate mortgage rates would fall to 6% by the end of this year and continue to fall to 5.6% by the end of next year.
In their latest forecast, economists in Fannie Mae’s Economic Strategic Research (ESR) group predict interest rates will be near 7% by the end of this year and remain above 6% in 2025 and 2026.
Economists at the Mortgage Bankers Association (MBA) are charting a similar path for interest rates in the coming years, with rates on 30-year fixed-rate mortgages still at 6.4% at the end of next year and averaging 6.3% in 2026. I expect it to be. .
In commentary accompanying their latest forecast, Fannie Mae economists said that strong consumer spending and rising inflation indicators, a sign of strength in the economy, will push bond market investors to increase yields on government bonds and mortgage-backed securities. He said he is looking for improvement.
Fannie Mae economists say the Fed has lowered short-term interest rates twice this year, on Sept. 18 and Nov. 7, but long-term rates are rising on expectations that the Fed’s monetary policy accommodation will taper off over the next few quarters. It is said that they are doing so.
The CME FedWatch tool, which tracks futures markets to gauge investors’ expectations about the Fed’s future mood, shows investors think the odds of the Fed cutting rates again on Dec. 18 are only marginally better. There is.
Fannie Mae economists say that the recent rise in long-term interest rates is due in part to “market expectations for more expansionary fiscal policy following the 2024 election results and increased overall policy uncertainty.” I think it might be something.”
Lawrence Yun
Lawrence Yun, an economist at the National Association of Realtors, predicted on Nov. 8 that mortgage rates could rise next year if policies implemented by the incoming Trump administration spur home construction and bring more people back into the workforce. He said there is a possibility of a decline.
Fannie Mae economists note that “there is uncertainty about future changes in fiscal, trade, and immigration policy” after the November election.
“Our current forecasts do not explicitly take into account potential changes in these areas as we await greater clarity on expected policy outcomes,” they said. .
A gradual recovery in sales is expected
Source: Fannie Mae November 2024 Housing Forecast.
Economists at Fannie Mae’s ESR Group lowered their home sales forecasts for 2024 and 2025, given the dramatically different outlook for mortgage rates in the coming years.
Fannie Mae economists currently project that total housing sales in 2024 will be 4.71 million units (previously 4.77 million units) and in 2025 total housing sales will be 4.93 million units (previously 5.24 million units). “
This follows a 16% decline in total home sales in 2023 to 4.76 million units, followed by a 1% year-on-year decline in total home sales in 2024.
Total home sales are expected to rebound 4.6% to 754,000 units next year, supported by a projected 7.2% increase in new home sales.
In their first attempt to predict home sales two years from now, Fannie Mae economists found that total home sales will increase “as mortgage rates ease, affordability improves modestly, and lock-in effects weaken.” It is predicted that the number will recover to 5.68 million units in 2026.
Existing home sales fell to an annual pace of 3.84 million in September, and Fannie Mae economists expect only 4.01 million existing home sales this year, with 2024 expected to be the same as 1995. It will be the slowest year since then, he said.
Fannie Mae economists still expect existing home sales to rise 4% to 4.18 million units next year. However, this is 345,000 fewer than the October forecast. Existing home sales are expected to register double-digit growth in 2026, increasing by 17% to 4.89 million units.
MBA economists expect existing home sales to rise 5% next year to 4.24 million units, followed by a 7% increase in 2026; .
Yun expects existing home sales to rise 9% next year and 13% in 2026 if mortgage rates stay near 6% and employers add 2 million jobs a year. There is.
Rising house prices will encourage the origination of mortgage loans.
Source: Fannie Mae November 2024 Housing Forecast.
The expected slowdown in sales will also impact mortgage originations, but as home prices continue to rise, lending is not expected to slow as quickly as sales.
Fannie Mae economists are revising their home price growth forecasts on a quarterly basis. The previous forecast, released in October, predicted that while home prices would rise 5.8% this year, national home price growth would slow to 3.6% next year.
Fannie Mae economists this month cut consumer mortgage growth in 2024 by $14 billion from their October forecast and by $102 billion from their previous forecast for 2025.
Although home sales in 2024 are expected to be slightly lower than last year, purchase loan originations are expected to increase 1% to $1.29 trillion as home prices continue to rise.
The amount of purchase loans is expected to increase by 9% to $1.41 trillion next year and further increase by 20% to $1.7 trillion in 2026.
Refinance amounts are expected to more than triple, from $221 in 2023 to $705 billion in 2026.
Single-family housing starts recover
Source: Fannie Mae November 2024 Housing Forecast.
Fannie Mae economists continue to expect single-family home starts to bottom out in 2023 and rise 6% to just over 1 million units this year.
Single-family housing starts are expected to fall by 1% to 994,000 next year, and grow by 5% in 2026.
“The outlook for single-family housing starts is slightly stronger in the near term,” Fannie Mae economists said. “Single-family housing starts rose to a five-month high in September. Overall, we continue to expect the housing shortage relative to population to drive home construction in the coming years.”
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