It will get much worse for the housing market and the mortgage industry. That’s the takeaway from a group of economists at Fannie Mae who slashed their forecast for 2022 home sales this week. Federal Reserve chairman Powell recently threw even more cold water on their predictions. What was in the Fannie Mae data? What do they predict for real estate the remainder of 2022 and 2023?
Why is Fannie Mae so important in the mortgage market?
Fannie Mae is the largest buyer of mortgages in the United States. When a conventional loan is typically made by a bank or broker, this loan is sold on to a buyer like Fannie Mae. Fannie Mae is one of the key players in the US real estate market and they are backed by the US government and in turn taxpayers. When Fannie Mae makes predictions it is critical to pay attention!
What was in the Fannie Mae data?
Fannie Mae recently released a huge downward revision to their prior forecasts. Fannie Mae’s Economic and Strategic Research Group expects total home sales to decrease 16.2% in 2022, a further downward revision from July’s projected drop of 15.6%.
The latest forecast also projects total mortgage origination activity at $2.47 trillion in 2022, down from $4.47 trillion in 2021. The mortgage market is projected to slip even further in 2023, dropping to $2.29 trillion.
A brutal housing market has already tested the business models of mortgage lenders, and it will be a while before conditions improve. In the second quarter of 2022, nonbank mortgage lenders on average lost $82 per loan, according to the Mortgage Bankers Association. Combining both production and servicing operations, only 57% of companies in the MBA report were profitable in the second quarter.
Fannie Mae is still optimistic on their forecasts
Whenever I look at any forecasts, I dig deeper into the data to see what assumptions were made. In this case, Fannie’s predictions for mortgage rates jumped off the page. Fannie is predicting that rates will average 4.7% in 2022 and then fall to 4.5% in 2023. Unfortunately, rates as I was writing this article are 6.3%. Fannie is already off over 30% on their rate predictions and rates are only headed higher!
Here is what Powell, the head of the federal reserve, said at his last speech in Jackson Hole: “We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. At our most recent meeting in July, the FOMC raised the target range for the federal funds rate to 2.25 to 2.5 percent, which is in the Summary of Economic Projection’s (SEP) range of estimates of where the federal funds rate is projected to settle in the longer run. In current circumstances, with inflation running far above 2 percent and the labor market extremely tight, estimates of longer-run neutral are not a place to stop or pause… Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” In summary the federal reserve is going to have to raise interest rates higher and longer than the market currently anticipates which means mortgage rates will trend upward from here the next several years.
Considerably more downward risk to Fannie forecast
With Powell’s recent speech, treasury yields and in turn mortgage rates have moved up considerably. They are currently 30% higher than the Fannie Mae predictions for a 30 year mortgage. If I assume that there is a one to one correlation between rates and sales then this year sales will drop 30% with another drop next year of 20% or higher as rates continue to defy market expectations.
Furthermore, the Fannie Mae forecasts show sales basically flat in 2023 (4% gain), with interest rates considerably higher than forecast and sales dropping more than originally thought, prices will adjust accordingly with drops around 15% in most markets and much larger drops in places like Boise, ID that basically tripled in value the last 3 years.
Summary:
Fannie dropped their original predictions in their mid-year update, but unfortunately they are still too rosy on mortgage rates which will in turn impact sales volumes and prices. Powell, in his recent federal reserve speech, made clear that rates will go up higher and stay there for years regardless of the economic outcome. With the federal reserve showing resolve, real estate will have a huge adjustment in the next year or so with slowing sales, rising inventory, and ultimately lower prices. The irony is that at the same time Fannie is predicting a large slowdown in real estate, they continue to increase the loan sizes they are willing to insure further increasing their risk and ultimately risk to taxpayers that are on the hook for loan defaults. I don’t see any glimmers of good news on the horizon.
Additional Reading/Resources:
- https://www.fanniemae.com/newsroom/fannie-mae-news/economy-constrained-competing-effects-elevated-inflation-and-strong-labor-market
- https://www.fanniemae.com/media/44466/display
- https://www.housingwire.com/articles/fannie-mae-sees-dark-days-ahead-for-the-housing-market/
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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