Is a sales slump coming?
The housing market is expected to experience a slight slowdown in 2024, according to the latest analysis from Fannie Mae’s economic experts.
Rising mortgage rates are the primary culprit, but a significant increase in the number of homes for sale is expected to prevent a major downturn.
In its May commentary, Fannie Mae’s Economic and Strategic Research (ESR) Group suggested that the steady climb in mortgage rates since the start of the year will likely dampen housing activity. However, it emphasizes that a sharp decline in sales is unlikely due to a 30% increase in active home listings compared to a year ago.
The group’s forecast predicts a gradual economic slowdown, with mortgage rates potentially settling near 7% by the end of the year. This could result in a slight dip in housing activity compared to previous projections. However, it is suggested that existing home sales will continue to see a modest upward trend, particularly compared to the historically low levels of the past two years.
“The question our economics team is asked most frequently by industry participants remains where we think mortgage rates are headed,” said Fannie Mae chief economist Doug Duncan (pictured). “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.”
Duncan also pointed out that many potential buyers are taking a “wait-and-see” approach, hoping for improved affordability before jumping into the market.
While the higher interest rate environment is expected to eventually dampen consumer spending, the ESR Group believes underlying economic growth in the first quarter remained solid. However, with household income not keeping pace with spending and debt interest payments remaining high, they anticipate a slowdown in overall economic growth as the year progresses.
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Despite these challenges, the group’s full-year 2024 real GDP outlook remains unchanged at 1.8%. They predicted that inflation will slow down throughout the year but remain persistent enough in the short term to prevent the Federal Reserve from cutting interest rates until September.
The ESR Group saw a potential upside to their forecasts if upcoming data leads market participants to believe the Federal Reserve is closer to easing monetary policy, which could drive mortgage rates down and stimulate housing activity.
“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,” Duncan said.
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