Housing a ‘Meaningful Driver of Inflation’ into 2022

Home sales and prices, new construction, supply and demand issues, and related metrics are big players in the overall economic outlook, according to economists at Fannie Mae, who say housing is poised to become a "meaningful driver of inflation" over the next year and a half.

Fannie Mae's Economic and Strategic Research (ESR) Group has revised some earlier predictions for 2021, modestly upgrading its overall economic growth expectations for full-year 2021 to 7.1%, one-tenth higher than its previous forecast. The group of economists noted that, while they believe some consumer spending and price increases (to which they attribute the changes) are transitory, price pressure in several sectors, housing included, could last into next year.

They added that rapid growth in home prices could "put upward pressure on inflation," as they recently pointed out in a Housing Insights piece.

The team says it "meaningfully downgraded" its forecast for second- and third-quarter home sales, largely due to the ongoing lack of available listings and the slowing pace of new construction due to supply constraints affecting homebuilders.

"Strong demand for housing continues to run up against a long-running lack of supply," said Doug Duncan, Fannie Mae SVP and Chief Economist. "We've seen this disconnect lead to rapid house price gains over this past year, but we believe it will soon reveal itself within inflation measures as well. Demographic factors remain favorable for a strong housing market and many of the supply constraints that homebuilders face are likely to  persist in the near term, so this upward pricing pressure is not likely to be as transitory as many of the current inflation drivers."

Duncan continued: "Nonetheless, in the past housing has served as an intermediate-term inflation hedge. If interest rates rise to reflect the increase in inflation based on an expectation of tighter future monetary policy, home sales would likely moderate along with house price appreciation."

The ESR team says they now expect 2021 sales to increase 4.2% from 2020, compared to 6.3% previously.

For new construction, they forecast 2021 housing starts to be 17.2% higher than in 2020, compared to their prior forecast of a 19.3% gain.

"Even with the downgrade, this still represents the fastest construction pace since 2013," commented the team. "However, due to stronger recent incoming data, our overall 2021 mortgage originations forecast was little changed at $4.1 trillion; a higher expected pace of refinancing activity offset downward revisions to purchase mortgage originations."

According to the ESR team, risks to housing, aside from inflation, include, "to what extent recent migration patterns to suburban areas and less expensive metros continue after full reopening, the effects on home sales and prices from the expiration of mortgage forbearance programs, and when housing construction supply chain problems are resolved."

The economists say that long-lasting inflation is a major risk to their forecast, although, they say, they were hesitant to make drastic forecast changes, as "uncertainties over consumer behaviors related to reopening and COVID-19 developments remain."

They say their outlook "appears to align with the views of financial markets, which is likely keeping longer-run interest rates subdued, leading to only modest effects on growth."

However, Fannie Mae's economists add, "this expectation is anything but certain."

Many factors could contribute to the life span of these "transitory" economic factors.

The full report—authored by Duncan, VP and Deputy Chief Economist Mark Palim, Economist Manager Eric Brescia, Economist Nick Embrey, Financial Economist Rebecca Meeker, and Business Analyst Richard Goyette—is available at FannieMae.com/research.