The housing market has not hit the bottom in existing home sales yet, Fannie Mae projected.
With mortgage rates having previously soared to around 8%, existing home sales will likely decline further to bottom out in early 2024. The good news is that sales will rebound as mortgage rates are expected to decline, Fannie Mae’s Economic and Strategic Research (ESR) group, said in its November commentary.
The lock-in effect and the low number of homes available for sale will persist for some time, but limiting factors will begin to diminish and affordability will improve as the 30-year fixed mortgage rates drop below 7%, the group explained.
Existing home sales declined 4.1% in October from September to a seasonally adjusted annual rate of 3.79 million, according to the National Association of Realtors. Compared to October 2022, existing home sales slumped 14.6%, down from 4.44 million.
Fannie Mae expects Q4 seasonally adjusted existing home sales to be 3.9 million on an annualized basis – the lowest since Q3 2010.
Total home sales are projected to come in at around 4.8 million in 2023, 4.7 million in 2024 and 5.3 million in 2025.
The ESR group forecast for 30-year fixed mortgage rates is an average of 7.7% in the fourth quarter, 7.3% in 2024 and 6.9% in 2025.
Given the downgrade to the home sales forecast, Fannie Mae expects purchase volumes to be $1.3 trillion in 2023, a downgrade of $28 billion from October’s projections.
Purchase volume will rise in 2024 to $1.4 trillion as housing sales increase, a downgrade of $31 billion from the prior forecast and $1.6 trillion in 2025.
Economic growth forecast
The group added a new economic forecast for 2025 to its November report.
Fannie Mae is forecasting the economy to expand by 1.6% in 2025 and expects the unemployment rate to peak at 5.4% in the middle of 2025, with core inflation trending toward the Federal Reserve‘s 2% target goal.
The group’s forecast of a mild recession in 2024 remained unchanged with the real gross domestic product (GDP) declining 0.4% on a Q4/Q4 basis.
While the combination of ongoing employment gains and decelerating inflation has increased the likelihood of a soft landing, the ESR group contends that, between a likely slowdown in consumption growth stemming from an imbalance between spending and incomes and the rising real federal funds rate weighing on consumer and business activity, a downturn remains the most likely outcome.
“The economy is now slowing from the otherwise robust first estimate of third-quarter growth,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist. “
The unemployment rate ticked up to 3.9% in October, half a percentage point above its recent low of 3.4% in April.
Consumer price inflation (CPI) also cooled in October declining to 3.2% from September’s 3.7%.
Energy prices decreased significantly but the declines were offset by the continued rise of shelter costs, the Bureau of Labor Statistics data showed.
“The slowdown in employment gains has continued, and stress is growing on consumers’ ability to sustain their high levels of spending – unsurprising results that we attribute to the often-lagged economic effect of monetary policy tightening. At the same time, housing has been and continues to be under serious affordability pressure, resulting in recessionary-level home sales activity,” Duncan added.
