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Fannie Mae lowers mortgage rates, home-price growth forecasts

Fannie Mae Downgrades Mortgage Rate and Home Price Growth Projections Through Mid-2025

In a significant update to its economic outlook, Fannie Mae has revised downward its forecasts for both mortgage rates and home price appreciation, signaling a more cautious view of the U.S. housing market's trajectory through July 2025. The government-sponsored enterprise's Economic and Strategic Research (ESR) group released these adjustments amid evolving economic indicators, including softening inflation trends and expectations for Federal Reserve policy shifts. This recalibration reflects broader uncertainties in the economy, such as potential recession risks and labor market dynamics, which could influence housing affordability and demand in the coming years.

At the heart of the revisions is a lowered expectation for the average 30-year fixed mortgage rate. Fannie Mae now anticipates that rates will average 6.7% for the full year of 2024, a slight decrease from its prior projection of 6.8%. Looking ahead to 2025, the forecast has been trimmed to an average of 6.4%, down from the earlier estimate of 6.5%. These adjustments come as the ESR group points to recent declines in longer-term interest rates, driven by market reactions to cooling inflation data and the prospect of the Federal Reserve initiating rate cuts as early as September 2024. Economists at Fannie Mae suggest that these developments could provide some relief to prospective homebuyers who have been sidelined by elevated borrowing costs over the past couple of years.

The downward revision in mortgage rate forecasts is closely tied to broader economic expectations. Fannie Mae's ESR team has maintained its prediction that the Federal Reserve will implement a total of 75 basis points in rate cuts by the end of 2024, with an additional 100 basis points of easing in 2025. This outlook is predicated on inflation continuing to moderate toward the Fed's 2% target, albeit at a pace that might not be as aggressive as previously hoped. However, the group has also flagged increasing risks of a recession, estimating a 30% probability of an economic downturn within the next 12 months. This heightened caution stems from recent labor market data showing a slowdown in job growth and rising unemployment rates, which could dampen consumer confidence and spending, including in the housing sector.

Shifting to home price growth, Fannie Mae has notably scaled back its projections, reflecting concerns over persistent affordability challenges and a potential softening in demand. For 2024, the ESR group now expects home prices to rise by 6.1%, a reduction from the previous forecast of 6.4%. The outlook for 2025 is even more subdued, with anticipated growth of just 3.0%, down from an earlier estimate of 3.5%. These figures are based on the FHFA Purchase-Only Index, which tracks home price changes across the nation. The downward adjustments underscore the impact of high mortgage rates on buyer purchasing power, as well as an ongoing shortage of housing inventory that has kept prices elevated but may begin to ease as market conditions evolve.

Doug Duncan, Fannie Mae's Senior Vice President and Chief Economist, elaborated on these trends in the ESR group's commentary. He noted that while recent economic data has been mixed, the overall direction points to a cooling economy that could lead to lower interest rates but also introduce headwinds for housing activity. "The combination of moderating inflation and softer labor market indicators has led markets to price in more aggressive Fed easing," Duncan explained. "However, this also raises the specter of a potential recession, which could further suppress home sales and price growth." This perspective highlights the delicate balance the housing market faces: lower rates might encourage more buyers to enter the fray, but economic uncertainty could keep many on the sidelines, prolonging the inventory crunch.

In terms of housing market activity, Fannie Mae's forecasts paint a picture of gradual improvement tempered by realism. Existing-home sales are projected to total 4.17 million units in 2024, a modest increase from the prior estimate of 4.13 million, with a further rise to 4.75 million in 2025, up from 4.71 million previously. This uptick is attributed to the anticipated decline in mortgage rates, which could unlock pent-up demand among move-up buyers and first-time entrants. On the new-home sales front, the outlook is slightly more optimistic, with 2024 sales expected to reach 710,000 units, revised up from 700,000, and 2025 projections holding steady at 750,000. These figures suggest that builders may continue to benefit from a relative undersupply of existing homes, potentially driving more construction activity despite higher material costs and regulatory hurdles.

The ESR group also provided insights into overall economic growth, which underpins these housing forecasts. Gross Domestic Product (GDP) is now expected to expand by 2.0% in 2024, down slightly from the previous 2.1% forecast, with 2025 growth projected at 1.9%, unchanged from prior estimates. This tempered growth outlook reflects a slowdown in consumer spending and business investment, offset somewhat by government expenditures. Inflation, as measured by the Consumer Price Index (CPI), is forecasted to average 3.0% in 2024 and 2.3% in 2025, aligning with the Fed's gradual path toward normalization. Unemployment is anticipated to rise modestly to 4.1% by the end of 2024 and 4.3% in 2025, adding to the narrative of a cooling but resilient economy.

These revisions have broader implications for the housing ecosystem. For homebuyers, lower projected mortgage rates could translate into improved affordability, potentially reducing monthly payments by hundreds of dollars on a typical loan. This might encourage more households to pursue homeownership, particularly in markets where inventory has been constrained. Sellers, on the other hand, may face a more competitive environment as price growth slows, necessitating realistic pricing strategies to attract buyers. Real estate professionals and lenders could see a pickup in transaction volume, but they must navigate the risks of economic volatility.

Looking deeper into the factors influencing these forecasts, it's worth considering the interplay between monetary policy and housing dynamics. The Federal Reserve's recent signals of impending rate cuts have already begun to influence Treasury yields, which in turn affect mortgage rates. Fannie Mae's economists point out that the 10-year Treasury yield has declined in recent weeks, contributing to the softer rate outlook. However, they caution that any resurgence in inflation or unexpected geopolitical events could reverse this trend, leading to higher borrowing costs and further pressure on home prices.

Inventory levels remain a critical wildcard. Despite some increases in listings over the past year, the U.S. housing market continues to grapple with a structural shortage exacerbated by years of underbuilding. Fannie Mae's projections assume a gradual normalization of supply, but if builders ramp up production in response to lower rates, this could accelerate price moderation. Conversely, if recession fears materialize, construction activity might stall, perpetuating the imbalance.

From a regional perspective, while Fannie Mae's forecasts are national in scope, variations across markets could amplify or mitigate these trends. Sunbelt states with strong population inflows might see more robust price growth, while areas with economic dependencies on manufacturing or energy could experience greater slowdowns. Affordability hotspots like California and New York may benefit disproportionately from rate declines, potentially boosting sales in high-cost urban centers.

In summary, Fannie Mae's latest economic outlook underscores a housing market at a crossroads. With lowered forecasts for mortgage rates and home price growth through July 2025, the enterprise is betting on a softer landing for the economy, facilitated by Fed actions. Yet, the elevated recession risk serves as a reminder of the fragility of this recovery. Stakeholders in the housing industry—from buyers and sellers to policymakers—will need to monitor incoming data closely, as shifts in inflation, employment, and interest rates could prompt further revisions. As the market evolves, these projections offer a roadmap for navigating what promises to be a dynamic period for U.S. real estate.

This comprehensive update from Fannie Mae not only reflects current economic realities but also provides valuable guidance for long-term planning. By anticipating a more moderate pace of home price increases and gradual rate relief, the forecasts suggest opportunities for stabilization in a sector that has weathered significant turbulence. Whether these predictions hold true will depend on a host of variables, but they highlight the interconnectedness of housing with broader economic health, emphasizing the need for adaptive strategies in an uncertain landscape.

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