Are homebuyers hesitating?
A recent decline in mortgage rates has not been enough to rejuvenate the US housing market, according to the August 2024 commentary from Fannie Mae’s Economic and Strategic Research (ESR) Group. Despite the slight easing of rates, the ESR Group forecasts that home sales will remain subdued for the remainder of 2024, with significant recovery unlikely until late 2025.
The report highlighted a lack of response from potential homebuyers, even with the improved rate environment. Key indicators, such as purchase mortgage applications, home showing requests, and online property listings views, all remained below their levels from a year ago. This stagnation has led the ESR Group to downgrade its total home sales forecast to 4.78 million units for 2024, down from previous projections. For 2025, the forecast stands at 5.19 million units, a modest improvement but still indicative of a sluggish market.
Hesitation among potential homebuyers
Fannie Mae’s Home Purchase Sentiment Index® reflects this market hesitation, with a near-record low share of respondents stating that it is a “good time to buy” a home. The report indicated that meaningful recovery in home sales will depend on a combination of income growth outpacing home price inflation and mortgage rates decreasing to around 6.0%.
In contrast to the existing home market, the outlook for new home sales remains comparatively strong. Homebuilders, benefiting from solid profit margins, are expected to offer more concessions in the coming quarters. However, a temporary slowdown in new construction is anticipated as the industry works through a backlog of homes already under construction.
Mark Palim, Fannie Mae’s vice president and deputy chief economist, noted the paradox of the current housing market. “The lower rate environment should be good for home sales by helping loosen the grip of the so-called ‘lock-in effect,’ in addition to aiding affordability more generally,” Palim said.
“Even with moderately lower mortgage rates, affordability remains close to historic lows due to the high level of home prices relative to incomes. We are therefore expecting continued sluggishness in home sales over the rest of the year. One bright spot for the mortgage industry has been the recent uptick in refinance applications, albeit from very low levels.”
Headed for a soft landing?
On the broader economic front, the ESR Group has revised its 2024 GDP growth outlook upward to 1.9%, citing stronger-than-expected performance in the second quarter. However, the outlook remains cautious, with a potential economic slowdown on the horizon due to factors like a low national savings rate and a rising unemployment rate, which reached 4.3% in July 2024.
The ESR Group has maintained a base case forecast of a soft landing but acknowledged that the likelihood of an economic downturn has increased. It noted this is due to the historical correlation between sharp increases in the unemployment rate and past business cycle recessions.
As the housing market struggles with affordability concerns and cautious consumers, Fannie Mae’s ESR Group has forecast mortgage rates to average 6.4% by the end of 2024, potentially dropping to 5.9% by the end of 2025.
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