High prices and tight inventory continue to limit housing affordability
The US economy is in better shape than previously thought, but the housing market continues to present affordability challenges, according to Fannie Mae Economic and Strategic Research (ESR) Group’s latest commentary.
In its October outlook, the group revised its GDP growth projections, now expecting smaller economic growth of 2.3% in 2024 and 2% in 2025, compared to earlier predictions of more severe deceleration.
This improved outlook came after significant revisions to personal income data, which showed income and consumption levels aligning more closely with historical norms.
As a result, the ESR Group believes the economy can sustain growth at or near its potential, assuming no major shocks to consumer or business confidence.
In addition, recent payroll growth in August and September has contributed to the positive outlook. However, there are still upside risks to mortgage rates, as the 10-year Treasury yield has risen more than 40 basis points from its mid-September low.
While mortgage rates were forecast to decline slightly – from 6% at the end of 2024 to 5.7% by the end of 2025 – home prices were expected to continue rising, although at a moderated pace.
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Fannie Mae projected annual home price growth of 5.8% in 2024 and 3.6% in 2025. These figures are only slight adjustments from previous forecasts, suggesting that housing affordability will remain a significant hurdle for many, especially first-time buyers. The combination of high home prices and tight inventory levels is likely to keep upward pressure on prices.
“While potential homebuyers have noticed the decline in mortgage rates over the last few months, they are equally aware that there has been little relief on the home price side, the other primary driver of unaffordability, particularly for first-time buyers,” Fannie Mae chief economist Mark Palim said in the commentary.
“The timing of the long-expected pick-up in home sales activity, as well as a further moderation in home price appreciation, will depend in part on the willingness of current homeowners to relinquish their low mortgage rates by offering their homes for sale. Of course, continued strong homebuilding activity will also play a significant role as the shortage of national housing stock remains the primary impediment to affordability.”
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