The lack of existing homes for sale on the market is driving a resurgence of home-price growth and supporting increases in new home construction, according to Fannie Mae’s Economic & Strategic Research (ESR) group.

“The extent of the ongoing lack of inventory has exceeded our prior expectation,” the ESR group said in its July commentary. “This ongoing lack of inventory, in part due to mortgage lock-in effects, has driven significantly stronger home price appreciation over the first half of 2023 than we had previously anticipated.”

Fannie Mae forecasts home-price growth for 2023 and 2024 will be positive 3.9% and negative 0.7% on a Q4/Q4 basis respectively, up from negative 1.2% and negative 2.2% in its previous quarterly update. 

With an ongoing tight supply of existing homes for sale on the market, the ESR group expects overall home sales in 2023 to remain near the lowest annual level since 2009. 

“We began discussing our expectations of a supply shortage in late 2014, and it remains front and center in the housing market in 2023,” Doug Duncan, senior vice president and chief economist at Fannie Mae, said in a statement.

“The supply of existing homes is near the 2009 crisis low, and it’s showing no signs of easing. This puts the onus on homebuilders and can be seen in the construction data,” Duncan added.

While the U.S. single-family homebuilding fell 7% in June, permits for future construction rose to a 12-month high as a severe inventory shortage supports new construction. Housing starts surged 18.5% in May to a pace of 997,000 units, the highest level in a year​​.

Homebuilders continue to use mortgage rate buydowns to help drive sales, and with many construction input prices — including that of lumber, which is lower than a year ago — builders continue to have ample margin to offer incentives, Fannie Mae pointed out. 

The ESR group in return upgraded its single-family housing starts forecast to 896,000 units for 2023 and to 890,000 units for 2024, up from 824,000 and 845,000, respectively.

The combination of an upward revision to the home price outlook and greater expected home construction has also led to a slight upgrade in Fannie Mae’s forecast of 2023 mortgage originations.

Fannie Mae anticipates total single-family originations to be $1.62 trillion in 2023, up from last month’s prediction of $1.59 trillion, while maintaining its forecast for 2024 single-family originations at $1.9 trillion.​​

Stronger pace of economic growth 

“Substantial revisions to first quarter data alongside ongoing resilience in the labor market and new home construction now point to the first half of 2023 having experienced a stronger pace of economic growth than we had previously expected,” the ESR group pointed out.

Inflation continued to decelerate on an annual basis with the Consumer Price Index (CPI) dropping to 3% in June, down from 4% in May.

Labor market indicators are painting a mixed picture to conclude that sufficient softening has occurred. Nonfarm payroll employment increased by 209,000 in June, while the April and May reports were revised downward by a combined 110,000 jobs.

Fannie Mae noted that the underlying tightness in the labor market is not consistent with inflation settling at a 2% target.

“Therefore, despite improvement in recent inflation measures, we expect Fed policy to remain tight until it is clear that the labor market has softened sufficiently,” according to the report. 

While Fannie Mae’s macroeconomic forecast is little changed from last month — including a call for a modest recession beginning in the fourth quarter of this year or the first quarter of next year — it has upgraded its real gross domestic product (GDP) growth outlook to 1.1% from 0.1% on a Q4/Q4 basis.