Freddie Mac’s US Economic, Housing, and Mortgage Market Outlook for June

On Thursday, Freddie Mac released its US Housing and Mortgage Market Outlook for June. Freddie Mac expects the US economy to continue to cool as consumers adjust their spending in response to higher interest rates. In Freddie Mac’s baseline scenario, they expect a slowdown in employment, accompanied by a modest uptick in the unemployment rate.

As inflation remains above the Federal Reserve’s target rate of 2%, an immediate cut in the federal fund rates is not on the horizon. However, in a scenario where the job market moderates sufficiently to keep inflation in check, Freddie Mac anticipates one rate cut in the latter half of the year. This potential scenario could lead to a gradual easing of mortgage rates. Freddie Mac expects mortgage rates to remain above 6.5% through the end of the year, which compared to the rates as high as 7.8% witnessed last year is a positive development and could offer some respite for potential homebuyers.

Mortgage rates have been volatile over the past month—hovering between 6.9% and 7.2%—and they are still relatively high, deterring home sales. Despite robust housing demand driven by first-time homebuyers, Freddie Mac expects home sales to remain muted. The current housing demand is highly concentrated in the entry-level segment of the housing market, where the supply is short due to limited construction. Additionally, trade-up buyers are almost nonexistent as there is a financial disincentive to give up low rates on their current home in exchange for a higher rate on the trade-up home. However, unwavering demand and tight supply are expected to push home prices up, potentially leading to further increased home prices in both 2024 and 2025.

Freddie Mac’s projection of mortgage origination is contingent on several factors, including home prices, home sales, and the cash share of purchases. As Freddie Mac anticipates a moderation in home sales, high prices, and a flat cash share of purchases, it expects purchase origination to be slightly higher in 2024 than in 2023. With mortgage rates above 7%, refinance activity is expected to be minimal. However, if interest rates drop below 6.5%, refinance activity could see some uptick, as millions of borrowers still have rates above 6.5%. Nevertheless, given persistent inflation, achieving rates below 6.5% is challenging. The forecast suggests a modest increase in total origination volumes this year and next, primarily driven by home prices.