High Mortgage Rates To Dampen Home Sales, Though Slight Recovery Expected, Says Fannie Mae

Fannie Mae’s Economic and Strategic Research Group has adjusted its outlook for the U.S. housing market for the remainder of 2024, suggesting a modest deceleration in activity due to persistently high mortgage rates.

Despite the forecasted slowdown, the group anticipates a slight uptick in housing starts, mortgage originations, and sales, depending on potential shifts in the Federal Reserve's monetary policy that could ease rates later in the year.

The organization anticipates a slowdown in economic development, with mortgage rates expected to ebb around 7% by the end of the year. The adjustment is slightly down from their earlier forecasts, influenced by a 30% year-over-year increase in active home listings, which should buffer any sales downturns. 

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Fannie Mae maintains a 1.8% growth expectation for the 2024 GDP, unchanged from previous estimates, despite signs that consumer spending may soon be tempered by the high-interest rate environment.

"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," Doug Duncan, Fannie Mae Senior Vice President and Chief Economist said in a news release.

"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," Duncan said. 

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Despite a slight downward revision in total home sales projections — now expected to reach 4.89 million in 2024 from an earlier forecast of 4.96 million — Fannie Mae still sees potential for growth if rates decrease.

Fannie Mae said that the scenario would also likely spur an increase in mortgage originations, though current estimates have been adjusted to $1.73 trillion for the year.

Fannie Mae’s insights come as the broader housing market struggles with high mortgage rates.

Recent data from the National Association of Realtors indicated a 1.9% drop in existing home sales in April, with the median sales price reaching a new high for the month.

"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," the chief economist said.

Looking ahead, Fannie Mae expects that the growth in consumer spending — which is outpacing income growth — will likely slow down, partly due to the depletion of savings and increasing debt service requirements, which are straining consumer finances.

On the inflation front, Fannie Mae forecasts a gradual moderation toward the Federal Reserve’s 2% target, although recent data suggest inflation may remain more persistent than previously expected. That stickiness in price increases, evident from core inflation metrics like the PCE and the CPI, suggests that inflationary pressures are not decreasing as quickly as hoped.

While Fannie Mae still predicts the Fed will begin to cut interest rates in September, they caution that the cuts will likely be limited to twice this year.

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