Falling mortgage rates should boost home sales: Fannie Mae

falling mortgage rates

Lower mortgage rates should boost home sales and give more homeowners an incentive to refinance in 2024, but it could take years for home sales and mortgage lending to recover to levels seen before the pandemic, Fannie Mae economists said Thursday.

In their latest forecast, Fannie Mae economists are considerably more optimistic than they were a month ago that mortgage rates have additional room to come down, projecting that 30-year fixed-rate mortgages will be available for less than 6 percent by the end of the year.

Lower mortgage rates could convince more homeowners to put their homes on the market and boost sales of new and existing homes by 4 percent this year and another 13 percent in 2025, Fannie Mae forecasts. Mortgage refinancing volume could nearly double to $490 billion, providing relief to struggling mortgage lenders.

 

With Fed policymakers signaling in December that they expect to cut the short-term federal funds three times this year, mortgage rates have already come down almost to where Fannie Mae had previously thought they’d be by the end of the year.

That partly explains why Fannie Mae’s latest forecast now anticipates that mortgage rates will fall to an average of 5.8 percent during the final three months of this year, and to 5.5 percent during Q4 2025. That puts Fannie Mae in line with a Dec. 12 forecast by the Mortgage Bankers Association, which hasn’t published its January forecast.

“Following the Fed ‘pivot’ in December, an anticipation of more dovish policy, and the recent decline in interest rates, our mortgage rate forecast has been revised meaningfully lower this month,” Fannie Mae economists said Thursday.

Futures markets tracked by the CME FedWatch Tool show investors are betting the Fed will cut the short-term federal funds five or six times in 2024, which would bring short-term rates down by 1.25 to 1.5 percentage points.

“While we think financial markets may have gotten ahead of themselves regarding the extent of Federal Reserve rate cuts this year (we currently forecast 100 basis points of cuts in 2024), the outlook for both short-term rates and mortgage rates is now decidedly lower than what we had previously forecast,” Fannie Mae economists said.

Home sales seen as hitting bottom in 2023

Source: Fannie Mae Housing Forecast, January 2024. 

Fannie Mae expects lower mortgage rates will help boost new home sales by nearly 8 percent in 2024, to 726,000, and sales of existing homes by 3.1 percent, to 4.238 million. Last month Fannie Mae economists projected new home sales would drop by 1.2 percent in 2024, to 673,000, and that sales of existing homes would grow by less than 1 percent, to 4.119 million.

 

“Existing home sales came in largely as expected in November,” Fannie Mae economists said. “Our forecast revision was driven largely by the lower projected interest rate environment and the removal of our recession call.”

But even the more optimistic forecast would represent “a comparatively sluggish pace of existing home sales, as affordability and a lack of supply remain challenges to the market,” Fannie Mae economists said.

With about 90 percent of outstanding mortgages backed by Fannie Mae having interest rates below 6 percent, lower rates will help some, but not all, homeowners feel less locked in to the low rate on their existing mortgage.

“Even at less than 6 percent, we think rates will still have a significant way to go in order to meaningfully reduce the ‘lock-in effect’ experienced by homeowners who refinanced or bought during the pandemic,” Duncan said.

The good news is that Fannie Mae economists expect the pace of home sales to post annual gains every quarter this year and next, as mortgage rates come down and price appreciation cools.

“However, a full recovery to the pre-pandemic sales rate is expected to take years, as housing affordability remains stretched extremely thin by historical standards relative to household incomes,” Fannie Mae forecasters said.

Annual home price appreciation projected to cool

Source: Fannie Mae Housing Forecast, January 2024. 

After falling to 2.6 percent in Q2 2023, home prices showed surprising strength in the second half of the year. Annual home price appreciation surged to 7.1 percent in the final three months of the year, as mortgage rates retreated from 2023 highs.

Fannie Mae economists expect lower mortgage rates will continue to shore up home prices, but that annual home price appreciation will begin to cool in Q2 2024 and drop to 3.2 percent by the end of the year. By Q4 2025, Fannie Mae is forecasting that annual home price appreciation will essentially be flat, at 0.3 percent.

“While moderating mortgage rates going forward will help support home prices, affordability is still going to remain historically challenging,” Fannie Mae economists said. “Combined with a cooling labor market, we see the ability of homebuyers to keep pushing prices upward as more limited.”

With rents expected to cool or come down in some markets, renting could look more attractive to some would-be homebuyers.

“We believe slowing or even declining multifamily rents in much of the country will also make the rent vs. buy calculus shift comparatively more favorable to renting multifamily units, reducing upward pressure on single-family home prices,” Fannie Mae economists said.

Purchase mortgage and refi volume expected to grow

Source: Fannie Mae Housing Forecast, January 2024. 

“With an expectation of rising home sales, moderating mortgage rates, a downward drift in the cash share of home sales, and continued positive home price growth, we forecast single-family mortgage origination dollar volume to grow significantly in 2024, albeit from a depressed starting level,” Fannie Mae economists said.

Fannie Mae forecasts that refinancing volume will grow by 99 percent in 2024, to $490 billion, and by another 53 percent in 2025, to $752 billion.

While that level of business pales in comparison to the $2.67 trillion lenders refinanced in 2021 when rates were still near historic lows, it could provide a much-needed boost to lenders who saw refinancing volume dwindle to just $246 billion last year.

Purchase loan originations are now expected to grow by 19 percent in 2024, to $1.487 trillion, followed by 14 percent growth in 2025, to $1.689 trillion.

Fannie Mae’s forecasts are put together by the Economic and Strategic Research (ESR) Group, a team of eight economists and economic analysts. In addition to Duncan, members of the ESR Group are Fannie Mae Deputy Chief Economist Mark Palim; economics managers Eric Brescia and Nick Embrey; and economic analysts Nathaniel Drake, Richard Goyette, Daniel Schoshinski and Ryan Gavin.