Fannie Mae ESR Group Modifies Expectations for 2024 Housing Activity

On Tuesday, the Fannie Mae Economic and Strategic Research (ESR) Group released its May commentary. The ESR Group expects housing activity will slow modestly compared to previous projections, if the broad upward movement in mortgage rates since the start of the year is sustained.

However, the ESR Group notes upside risk to its latest forecasts for housing starts, single-family mortgage originations, and home sales activity—particularly if upcoming data releases lead market participants to believe that the Federal Reserve is closer to easing monetary policy, which would likely push mortgage rates downward.

The ESR Group forecasts overall economic growth to slow and mortgage rates to end the year near 7%. As a result, they expect a slight slowdown in housing activity through 2024 compared to their previous forecast. However, with active home sale listings now up approximately 30% compared to a year ago, the ESR Group believes sizable declines in home sales are unlikely and continues to forecast a modest upward drift in existing home sales over the forecast horizon, particularly compared to the historically low sales levels of the previous two years.

The ESR Group’s full-year 2024 real GDP outlook is unchanged at 1.8%, as underlying growth in Q1 remained solid but still appears on track to slow as the year progresses. Household income growth has not kept pace with strong consumer spending and personal outlays on debt interest remain high, suggesting to the ESR Group that the higher interest rate environment will eventually weigh on future consumption.

Combined with potential softening in payroll employment growth, the ESR Group expects inflation to decelerate through 2024 but remain sticky enough in the near term to prevent a Federal Reserve rate hike until September.

In remarks accompanying the report, Fannie Mae Senior Vice President and Chief Economist Doug Duncan said:

“The question our economics team is asked most frequently by industry participants remains where we think mortgage rates are headed. For now, we see rates remaining closer to 7% through the end of the year—before trending downward in 2025—but note potential downside to that forecast given recent actual movements in rates. Our consumer survey suggests that households who are paying attention to the housing market continue to take a wait-and-see approach. This is consistent with our latest housing forecast, which does not foresee a dramatic change in activity until affordability improves. Given ongoing supply constraints and recent indications that the labor market may be weakening, a downward movement in mortgage rates appears to be the likeliest lever to achieve an improvement in affordability.”