Fannie Mae optimistic that mortgage rates will dip below 6% by year-end

Fannie Mae has a rosy outlook for mortgage rates. The government sponsored enterprise is projecting that rates will drop below 6% by the end of 2024, which in turn will boost refi volumes and help thaw the existing home sales market. 

Following years of volatility in mortgage rates, the housing market will begin its gradual return to a more normal balance in 2024. 

Courtesy: Fannie Mae

Fannie Mae’s economic and strategic research (ESR) group expects home sales and mortgage origination activity to begin a gradual recovery in the presence of a slow-growing economy. 

“Inflation’s decline and the resultant Fed pivot to signaling future rate cuts rates lead us to believe that home sales and mortgage originations likely bottomed out in the second half of 2023 and that a gradual improvement is now underway. We expect mortgage rates to dip below 6% by year-end 2024 and for homebuilders to continue to add new supply, both of which should aid affordability,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist. 

The ESR group expects the annualized pace of existing home sales to move up to 4.5 million units by the fourth quarter of 2024, up from 3.8 million in Q4 2023.

Courtesy of Fannie Mae

Overall, Fannie Mae expects that the slowly normalizing existing homes market, as well as additional housing supply from the construction of new homes, will help keep further home price growth in check in 2024.

Home prices are now expected to rise 3.2% over the year, compared to 7.1% in 2023.

Origination volume forecast for 2024

Fannie Mae forecasts the total single-family mortgage originations volume to be $1.98 trillion in 2024 and $2.44 trillion in 2025, up from $1.50 trillion in 2023.

Of the total $1.98 trillion origination volume in 2024, $1.5 trillion is projected to come from purchase origination volume, a 19% increase from $1.3 trillion in 2023.

Courtesy of Fannie Mae

Refinance mortgage origination volume will remain subdued as about 90% of outstanding Fannie Mae single-family conventional 30-year fixed rate mortgage loans currently have a note rate below 6%.

“So, while many recent borrowers from 2023 will begin to face meaningful benefits by refinancing, a strong refinance wave driven by rate-term borrowers is not expected in 2024. Even as rates moderate, we expect continued interest in cash-out refinancing relative to past periods, especially given heightened levels of aggregate homeowner equity available following the home price gains of the last few years,” the ESR group said. 

Economic backdrop looks more positive 

Another good news is that Fannie Mae removed its explicit call for a recession in 2024 and replaced it with an expectation of “below-trend growth.”

While Fannie Mae had forecast a modest downturn in 2024 up until last year, the ESR Group noted the rapid recent easing in financial conditions following the Federal Reserve’s December meeting and the solid, upward trend in real personal income growth in October and November as positive impulses for growth over the coming quarters.

As a result, Fannie Mae upgraded its 2024 economic outlook to a modest expansion of 1.1% from a 0.3% Q4/Q4 contraction of real gross domestic product (GDP).

Still, the ESR group believes the economy remains at a higher-than-normal risk for a recession in 2024. 

Mixed labor market signals, recent rise in shipping rates due to  attacks on container vessels in the Red Sea and easing of monetary policy opening doors for inflation to possibly reanimate are among the factors that Fannie Mae listed as risks for a recession.

“Our baseline forecast continues to show inflation trending toward the Fed’s 2% target over the course of the year, but risks to the outlook remain,” said the ESR group.