Join the movement at Inman Connect Las Vegas, July 30 – Aug. 1! Seize the moment to take charge of the next era in real estate. Through immersive experiences, innovative formats and an unparalleled lineup of speakers, this gathering becomes more than a conference — it becomes a collaborative force shaping the future of our industry. Secure your tickets now!

What a difference a month makes: Economists at Fannie Mae no longer expect mortgage rates to fall below 6 percent this year or next and believe that “dual affordability constraints” of high home prices and mortgage rates will also keep 2024 home sales from hitting a previously forecast 5 million mark.

Last month, Fannie Mae’s eight-member forecasting team was projecting that rates on 30-year fixed-rate mortgages would drop to an average of 5.9 percent by the final three months of the year and that sales of new and existing homes would total 5.0 million.

In their latest monthly housing forecast Tuesday, Fannie Mae’s Economic and Strategic Research (ESR) Group projected mortgage rates will average 6.4 percent during Q4. While 4.91 million homes are expected to change hands this year, deals will be driven primarily by households that can no longer put off moves due to life events.

Doug Duncan

“The housing market is likely to continue to face the dual affordability constraints of high home prices and elevated interest rates in 2024,” Fannie Mae Chief Economist Doug Duncan said in a statement. “Hotter-than-expected inflation data and strong payroll numbers are likely to apply more upward pressure to mortgage rates this year than we’d previously forecast, as markets continue to evolve their expectations of future monetary policy.”

Even if mortgage rates stay elevated, sales of new and existing homes are expected to be stronger than last year, although the projected rebound isn’t quite as strong as Fannie Mae had forecast last month.

“We believe an increasing number of transactions will be driven by households who can no longer put off their moves simply due to interest rate lock-in effects because they need to move for life event reasons,” Fannie Mae economists said in commentary accompanying their latest forecast.

Weaker rebound in 2024 home sales projected

Source: Fannie Mae housing forecast, March 2024

Sales of existing homes, which make up the bulk of most real estate agents’ businesses, are now projected to grow by only 3 percent in 2024, to 4.21 million. That’s about 47,000 fewer existing home sales than forecast in February.

Sales of new homes are expected to grow by close to 5 percent this year, to 699,000, which is down 35,000 from last month’s forecast for 734,00 new home sales in 2024.

“While existing sales rose 3.1 percent in January to an annualized pace of 4.0 million, these increases reflected mortgage rates in November and December,” Fannie Mae economists noted. “Pending sales, which lead closings on average by a month or two, fell in January by 4.9 percent, pointing to a likely pullback in February.”

Diminished expectations for lower mortgage rates

Source: Fannie Mae housing forecast, March 2024

Last month, Fannie Mae forecasters were predicting that rates on 30-year fixed-rate mortgages would fall to 5.9 percent in Q4 2024 and 5.7 percent in Q4 2025. The latest forecast is that rates will make a more gradual descent to 6.0 percent by Q4 2025.

“Strong headline jobs numbers and hotter-than-expected inflation data … led financial markets to price in a less aggressive rate-cutting path by the Federal Reserve,” Fannie Mae economists said in predicting that mortgage rates have less room to come down than previously thought.

While economists with the Mortgage Bankers Association predicted in February that mortgage rates would drop to 5.5 percent by Q4 2025, their March forecast hadn’t been issued Tuesday.

This year’s rally in mortgage rates kicked off with a surprisingly strong jobs report on Feb. 2, which put to rest speculation that the Federal Reserve might begin lowering the short-term federal funds rate in March.

Purchase mortgage applications fell for five consecutive weeks before mortgage rates began to ease again in early March. But more recent inflation data has been pushing mortgage rates higher again since March 11.

The CME FedWatch Tool, which tracks futures market investors’ expectations of the Fed’s next moves, on Tuesday put the odds that the Fed will approve one or more rate cuts by June 12 at just 59.5 percent, down from 76.2 percent on Feb. 16.

But it’s not just when the Fed starts cutting short-term rates, but how deeply it might cut over the next two or three years that’s of importance to investors who fund most mortgages.

“In our view, whether the Fed begins cutting interest rates in June or later in the year is likely to have only a small impact on the macroeconomy and mortgage rates,” Fannie Mae economists said. “In contrast, we believe the market’s expectations of the cumulative change in the fed funds rate over the next two to three years will likely have a more meaningful impact on mortgage rates.”

Unlike the short-term federal funds rate, the Fed doesn’t have direct control over mortgage rates, which are determined largely by investor demand for mortgage-backed securities (MBS). But having purchased trillions of dollars in MBS and Treasurys to keep interest rates low during the pandemic, the Fed does have influence in MBS markets that determine mortgage rates.

“Quantitative tightening” — the Federal Reserve’s ongoing program to trim $35 billion in mortgages from its balance sheet each month — could keep mortgage rates from falling dramatically this year.

When Fed policymakers meet Wednesday, they’re expected to keep their target for the short-term federal funds rate at 5.25 percent to 5.50 percent. But Fannie Mae economists say bond market investors are expecting some discussion of the quantitative tightening policy, which Federal Reserve Governor Christopher Waller has said is falling short of expectations.

In a March 1 speech, Waller said he’d like to see the Fed reduce its $2.4 trillion in mortgage holdings to zero. But because few homeowners have an incentive to refinance their existing loans, the Fed has been falling short of its target of reducing its MBS holdings by $35 billion a month.

Rather than actively selling MBS, the Fed has been letting those investments roll off its balance sheet passively, by not replacing assets that mature. But that strategy has only been trimming the Fed’s MBS balance sheet by about $15 billion a month.

To hit the $35 billion a month target, the Fed would have to start selling MBS. Even the threat of such a move might push mortgage rates higher, prompting real estate industry groups to plead with the Fed in October to go on record that it would not sell mortgages the central bank bought during the pandemic.

Refinancing projected to bounce back from anemic levels

Source: Fannie Mae housing forecast, March 2024

With home prices expected to stay elevated, purchase mortgage originations are expected to post 12 percent growth this year, to $1.367 trillion, a downgrade of $90 billion from last month’s forecast, followed by 13.5 percent growth in 2025, to $1.551 trillion.

“We have downgraded our outlook for purchase originations due to downgrades to the home sales forecast (which in turn stems from a higher mortgage rate outlook), as well as incoming data indicating a continued higher cash share of purchase transactions occurring,” Fannie Mae economists said.

Refinancings are projected to grow 60 percent this year from last year’s anemic levels, to $397 billion, or $62 billion less than forecast in February. Next year Fannie Mae is forecasting another 58 percent increase in refinancing volume, to $626 billion, as lower rates give more homeowners an incentive to refinance.

Get Inman’s Mortgage Brief Newsletter delivered right to your inbox. A weekly roundup of all the biggest news in the world of mortgages and closings delivered every Wednesday. Click here to subscribe.

Email Matt Carter

This post was originally published on this site