Fannie Mae’s Economic and Strategic Research Group Releases January Commentary on the US Housing Market

On Thursday (1-18-24), Fannie Mae’s Economic and Strategic Research (ESR) Group released its January commentary on the US housing market. According to the ESR Group, the housing market is expected to begin a gradual return to a more normal balance in 2024, following years of substantial movement in mortgage rates and divergence of key housing market measures from their historical, pre-pandemic relationships.

The ESR Group expects the following to occur in 2024:

• Mortgage rates will likely decline in 2024, ending the year below 6%.
• The lower rate environment is expected to boost refinance volumes—which are already on the upswing, as evidenced by the recent uptick in Fannie Mae’s Refinance Application-Level Index—to nearly double their 2023 levels in 2024.
• Lower rates are also likely to help “thaw” the existing-home sales market currently affected by the so-called “lock-in effect.” In fact, the ESR Group expects the annualized pace of existing home sales to move up to 4.5 million units by 2024Q4, compared to 3.8 million in 2023Q4. However, a full recovery to the pre-pandemic sales rate is expected to take years, as housing affordability remains stretched extremely thin by historical standards relative to household incomes.
• The ongoing lack of supply and affordability constraints in the existing-home market are expected to continue to bolster the market for new single-family homes, with 2024 starts and new-home sales forecast to top 2023 levels.
• The ESR Group expects that the slowly normalizing existing-home market, as well as additional housing supply from the construction of new homes, will help keep further home price growth in check in 2024: Home prices are now expected to rise 3.2% in 2024, compared to 7.1% in 2023.

The ESR Group’s latest forecast continues to project a slowdown in economic growth in 2024; however, it now anticipates a brighter economic backdrop compared to previous months, having replaced its call for a modest recession with positive-but-below-trend growth in 2024.

Adding additional background to the ESR Group’s January commentary, Fannie Mae Senior Vice President and Chief Economist Doug Duncan said:

“In 2024, we expect home sales and mortgage origination activity to begin a gradual recovery in the presence of a slow-growing economy. Inflation’s decline and the resultant Fed pivot to signaling future rate cuts rates lead us to believe that home sales and mortgage originations likely bottomed out in the second half of 2023 and that a gradual improvement is now underway. We expect mortgage rates to dip below 6% by year-end 2024 and for homebuilders to continue to add new supply, both of which should aid affordability. Additionally, the decline in mortgage rates is likely to push refinancing volumes upward, along with some pickup in purchase financing. However, even at less than 6%, we think rates will still have a significant way to go in order to meaningfully reduce the ‘lock-in effect’ experienced by homeowners who refinanced or bought during the pandemic. Overall, we expect 2024 to be a better year than 2023 for homebuyer affordability and the mortgage industry.”