Pent-up demand could support home sales as mortgage rates rise

Rising mortgage rates and house prices should mean fewer bidding wars in the months ahead, but there’s still plenty of pent-up buyer demand to support home sales this year.

That’s according to the latest forecast from economists at Fannie Mae, who expect a “significant” drop in quarter-on-quarter home sales following a year-end spike that appears to have been at least partially due to home buyers rushing to lock in at low rates.

While Fannie Mae forecasters expect the Federal Reserve to raise short-term rates by one percentage point over the next few months, they see mortgage rates stabilizing later this summer as the Fed makes a break in July to assess the effects of the tightening.

If that happens, the recent rise in mortgage rates and house prices could help cool home price appreciation – without significantly hurting home sales this year.

Projected home sales

Projected sales of new and existing homes in 2022 and 2023. Source: Fannie Mae Economics and Strategy Research Group.

While Fannie Mae economists expect existing home sales to fall 4.6% this year to 5.84 million, that’s a far cry from the 9% decline seen last time rates mortgages increased by one percentage point. And the expected 15% growth in new home sales, to 879,000, would mean new and existing home sales would fall just 2.4% this year, to 6.72 million.

With homes still in short supply, many potential buyers have lost in the bidding wars, but may still be looking for a home.

“So we find that growing affordability issues aren’t hampering short-term sales as much as they might have otherwise,” Fannie Mae economists said. “The effect of lower buyer prices should mean fewer bidding wars and slower house price appreciation, but not a lack of transactions.”

If mortgage rates and house prices continue to rise, however, this could lead to longer-term problems, with sales of new and existing homes expected to decline another 3.4% in 2023.

“The percentage of median household income required to pay the mortgage on a home at the median price using current mortgage rates has now eclipsed the peak of the last cycle reached at the end of 2018 and is close to comparable levels at the start of the 2000s before the bubble years,” Fannie Mae forecasters said. “In our view, this is not an immediate cause for concern, but we do believe that demand for home purchases should ease going forward as mortgage payments no longer look affordable relative to the historical range. Increasingly, more potential buyers are likely to be overpriced.

Projected house price appreciation

Projected annual house price appreciation in 2022 and 2023, by quarter. Source: Fannie Mae Economics and Strategy Research Group.

The good news is that economists at Fannie Mae see home price appreciation slowing significantly, to 7.6% by the end of this year, from 17.3% in the last three months of 2021.

Construction of new single-family homes should help offset some of the impact of ongoing shortages of existing homes and contribute to affordability.

“The limiting factor for new home sales is how quickly builders can overcome material shortages, supply chain bottlenecks and labor shortages, in order to manage their backlog. production,” said Fannie Mae forecasters.

Projected Mortgage Rates

Projected mortgage rates for 2022 and 2023. Source: Fannie Mae Economic & Strategic Research Group, Mortgage Bankers Association.

Fannie Mae forecasters expect mortgage rates to stabilize at 3.7% in the second half of 2022 as the Fed takes stock of short-term interest rate hikes that are seen as inevitable this spring. Although a daily index of rate foreclosure data compiled by Optimal Blue shows mortgage rates have already topped 4% for many borrowers, Fannie Mae’s forecast follows a weekly survey by Freddie Mac.

“Inflation continues to accelerate, reaching a new 40-year high in January. As a result, the Federal Reserve appears poised to embark on a more aggressive tightening policy than previously expected,” Fannie Mae forecasters said. “We now expect a 50 basis point hike to occur in March, the start of a multi-year tightening period through 2023.”

Whether the Fed’s initial rate hike in March was 25 or 50 basis points, Fannie Mae economists expect 100 basis points of cumulative increases in the fed funds rate by the end of July.

“However, where we currently diverge from our view of futures markets is that after the first rate hikes, we expect a pause from July until the end of the year, with the Fed also evaluating the effects rate changes to date like the consequences of starting to let its balance sheet sink,” Fannie Mae forecasters said.

The Fed’s $120 billion monthly purchases of government debt and mortgage-backed securities during the pandemic helped bring interest rates down to historic lows, but also inflated the Fed’s balance sheet to nearly $9 trillion.

Now that the Fed has ended these purchases, some policymakers are eager to start trimming the Fed’s balance sheet, which could also put upward pressure on interest rates.

Given that Fed policymakers “have less experience with this policy tool relative to increases in the fed funds rate,” there is “an increased level of uncertainty around the true effects of balance sheet runoff,” they said. Fannie Mae economists said of their expectations that the Fed will pause its interest rate hike in July.

Unknowns that could impact this pace of rate hikes include political tensions in Ukraine and unforeseen COVID-related disruptions to consumer behavior and the labor market, Fannie Mae forecasters said.

Doug Duncan | Photo credit: Fannie Mae

“Headline inflation will likely decline from year-ago levels as price pressures ease, but upward price pressures are unlikely to be as fleeting as previously thought. initially – and it is likely that the time period needed for inflation to reverse has been extended significantly,” Fannie Mae chief economist Doug Duncan said in a statement. to a few months ago, financial markets now expect a significantly more aggressive monetary stance from the country’s central bank, which should lead to increased volatility as the Fed retains the option needed to stage a landing gently non-inflationary.”

Projected mortgage originations

Projected mortgage amounts for 2022 and 2023. Source: Fannie Mae Economics and Strategy Research Group.

While Fannie Mae economists see home sales falling slightly this year, house price increases mean mortgage applications will rise about 9%, to $2.03 trillion.

Refinances, however, are expected to drop 56% to $1.13 trillion as fewer homeowners are able to beat their current rate.

Get Inman’s Extra Credit newsletter delivered straight to your inbox. A weekly summary of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.

Email Matt Carter