Why is Fannie Mae optimistic about a housing market recovery?

The year 2024 has started with cautious optimism that mortgage rates will drop, sparking much-needed activity in the sluggish U.S. housing market.

Mortgage rates, however, have been on a rising trend of late. Recent data shows that the economy is booming, while the Federal Reserve is signaling that it will take its time before cutting benchmark interest rates. 

HousingWire’s Mortgage Rates Center showed the 30-year fixed-rate mortgage at 7.21% on Feb. 23. And according to Freddie Mac‘s Primary Mortgage Market Survey, the average rate inched closer to 7% this week.

Fannie Mae, however, remains optimistic that housing market activity will pick up as existing home sales and new single-family housing starts are expected to grow modestly in 2024.

While existing home sales dipped slightly in December by 1% to a seasonally adjusted annual rate of 3.78 million units, an increase in mortgage applications and December pending home sales that led to average closing times of 30 to 45 days indicate that a modest rebound in sales is underway. 

With a low supply of existing homes for sale, demand for new homes is likely to remain strong, and the limit on new home sales will be determined by homebuilder production capacity, according to a report released Friday by Fannie Mae’s Economic and Strategic Research (ESR) group. 

“Single-family permits in contrast edged up 1.6 percent in January, back in line with the overall starts series,” the report noted. “With single-family permits and starts now back in alignment, we expect new single-family construction to continue to drift upward in coming months.”

Fannie Mae forecasts total mortgage origination volume of $1.92 trillion in 2024, down slightly from $1.98 trillion in its previous forecast. Volume is expected to climb to $2.36 trillion in 2025, compared to the ESR group’s January forecast of $2.44 trillion.

Softening economic growth anticipated 

The ESR group upgraded its 2024 macroeconomic growth outlook due to a stronger-than-expected fourth-quarter 2023 gross domestic product (GDP) report, as well as incoming data on recent population growth and immigration trends that point to faster payroll and GDP gains over the forecast horizon. 

Fannie Mae’s 2024 GDP outlook is for 1.7% growth in 2024, compared to 3.1% in 2023. The ESR group previously forecast a “mild recession” for 2024.

“An unsustainably low savings rate suggests softer consumer spending going forward, consistent with the pullback in January retail sales, and slowing local and state tax receipts point to slower direct government spending growth,” the report stated.

Further, while payroll growth looks to have reaccelerated in December and January, other labor market measurements indicate softness. The ESR group expects that the labor market “on net” is likely to cool in the near future.

“Market dynamics continue to reflect significant uncertainty regarding the sustainability of stronger-than-expected recent GDP growth, the continuity of the decline of inflation, and the path of monetary policy change, not to mention the many ways in which historical relationships in housing and the larger economy remain out of balance post-pandemic,” Doug Duncan, Fannie Mae senior vice president and chief economist, said in the report.