Housing market predictions: Fannie Mae revises 2023 home price forecast upward

Amid mortgage rates now hovering well over 7%, Fannie Mae economists have revised their housing market forecast as home prices remain even stickier than expected.

In a new commentary issued Monday, Fannie Mae’s Economic and Strategic Research Group warned that a jump in long-term interest rates is expected to weigh on the economy, and yet home prices have proven “resilient” through the third quarter of 2023. However, home price “deceleration” is likely in 2024 as mortgage rates are expected to go higher.

As measured by the Fannie Mae Home Price Index, the economists now expect U.S. home prices to grow by 6.7% on a year-over-year basis in the fourth quarter of 2023, up from a previous forecast of 3.9%. They wrote the upgrade is “largely due to higher-than-expected incoming transaction data over the third quarter.”

“House prices have proven to be more resilient than expected in light of higher mortgage rates and affordability challenges,” Fannie Mae researchers wrote.

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The economists, however, are still predicting home prices to decelerate next year, and they’re forecasting house price growth to slow to 2.8% year over year by the end of 2024.

“In many ways, the housing market experienced four years of business in a two-year period between mid-2020 and mid-2022,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist. “With ongoing affordability constraints and rising mortgage rates, much of that activity has essentially been given back. We expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability into 2024.”

Fannie Mae economists also revised their total home sales forecast down slightly due to higher mortgage rates on the horizon.

“We forecast sales to be 4.81 million and 4.80 million in 2023 and 2024, respectively, down from our prior forecast of 4.84 million and 4.88 million, respectively,” they wrote. “Despite the lower sales forecast, due to the higher house price outlook, our forecast for mortgage origination volumes was unchanged for 2023 at $1.56 trillion and revised slightly upward for 2024 to $1.90 trillion (previously $1.88 trillion).”

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Further declines in home sales from an already low level amid today’s mortgage rates will likely appear “muted relative to the slowdown in 2022,” the economists noted, according to a news release.

Fannie Mae’s research group also warns that now that rates are moving rapidly again, and overtime they’re expected to weigh on consumer consumption, business investment and hiring as low-interest debt is rolled into higher rates. Still, they also note that the U.S. economy likely faces “fewer structural headwinds than previously thought” after data revisions showed consumption and incomes in “better balance than had been reported previously,” the news release stated.

The latest data indicates the “consumer has been in a better position than previously thought,” which increases the likelihood that the Federal Reserve can successfully bring the economy down to a “soft landing” as it continues to tamp down inflation, Duncan said.

“However, despite consumer resiliency, the recent rise in interest rates has been precipitous, and in past environments — even with less severe interest rate shocks — this has led to economic dislocations,” Duncan warned. “As such, we still expect to see a mild economic downturn in the first half of 2024.”

Even though the rate of inflation has slowed and continues to slow, Duncan said “we continue to take the Federal Reserve at its word that rates will be ‘higher for longer’” until annual inflation stabilizes at 2%, “though at this time, in part because of the recent run-up in long-term rates, we do not expect additional Fed rate hikes.”

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