According to a new report from Fannie Mae’s Economic and Strategic Group (ESR), a combination of rising interest rates and elevated inflation will continue to weigh on the housing market and are now predicting a 1.2% full-year market growth.
The ESR is still predicting a modest “economic contraction” beginning in late 2023 due to the fact that consumers’ resilience to the predicted financial stress remains an unanswered question, and are further predicting that residential fixed investment is projected to decline 8.6% in 2022 and 6.5% in 2023.
Substantially higher mortgage rates are now the limiting reagent of the housing market. The ESR predicts that total home sales will fall 13.5% in 2022, down from their prediction 11.1% in May, and expects that mortgage originations will slide to $2.6 trillion in 2022 and $2.2 trillion in 2023.
It’s no surprise that refinance origination activity has been down in light of rising rates; only an estimated 2% of outstanding mortgages have at least a 50 basis-point incentive to refinance.
“The market’s expectations of the necessary Federal Reserve response to persistent broad-based inflation continue to adjust,” said Doug Duncan, Fannie Mae SVP and Chief Economist. “Tightening financial conditions are slowing economic activity, and consumers are drawing down savings and increasingly relying on credit cards as they seek to maintain current levels of consumption.”
“The significant, sudden rise in interest rates is beginning to be felt widely as employment growth slows and stock market valuations fall,” Duncan said. “Nowhere is this more evident than in housing affordability measures, with the prospective monthly payment on a typical new mortgage climbing dramatically. As a result, both new and existing home sales continue to slow, while refinance activity has fallen substantially, with what’s left largely consisting of equity extraction.”
“Our view continues to be that the magnitude of response required of monetary and fiscal tightening to return inflation to the Federal Reserve’s target will likely result in a recession, which we currently expect will be modest and occur next year,” Duncan concluded. “Notably, the recent market response to continued heightened inflation suggests that the predicted recession could occur sooner and be deeper than our current baseline forecast.”
Click here to view the report in its entirety.