Fannie Mae Forecast: Affordability in the Housing Market will Take Time

On January 20, 2023, Fannie Mae released its latest forecast with the findings and predictions of their Economic & Strategic Research Group (ESR). The report includes an upward revision for 2022 GDP growth and a downward revision for home price growth in 2023.

Fannie Mae expects to see more of the ongoing correction in U.S. housing market affordability this year. With the gap between household incomes and housing costs narrow, a correction will create a more sustainable relationship.

Ultimately, it forecasts a recovery for the housing market with a combination of falling home prices, declining mortgage rates and time. It also expects the process to take multiple years. 

Here are the highlights from the Fannie Mae forecast. 

The return to pre-pandemic levels of affordability will take time

The ESR does see the housing market on the road to recovery. But the process is likely to take multiple years as the gap between housing costs and household income will take time to narrow as much as it needs to.

That said, it’s important to make it clear to your clients and community that these affordability challenges are far less likely than in 2008 to result in a foreclosure crisis.

So, while Fannie Mae has revised its final estimate for 2022 GDP growth upward to 0.8% from 0.4%, it still expects a modest recession to begin in 2023, most likely in the first half.

Its forecast for the Q4/Q4 GDP growth for 2023 is a negative 0.6%, down a tick from its previous forecast. Fannie Mae has also revised its forecast for home price growth with a drop of 4.2% in 2023, followed by a 2.3% drop in 2024 on a Q4/Q4 basis.

Those forecasts are down from earlier projected declines of 1.5% and 1.4%, respectively. So, cumulatively, according to the Fannie Home Price Index, the ESR group expects home prices to drop 6.7% over the next two years.

It’s a more modest forecast than earlier reports from Capital Economics and Moody’s Analytics. 

Fannie Mae also expects subdued home sales for the rest of 2023, projecting a total of 4.52 million units—down 21.3% from its final estimate of 2022 sales and marking the slowest annual pace for home sales since 2010.

The forecast includes a partial rebound in 2024, with total home sales growing 12.8% to 5.1 million units as the overall economy recovers, rising at a still subdued pace as housing affordability still falls short of pre-pandemic norms.

Its outlook for mortgage originations for single-family homes has also contracted, dropping to $1.64 trillion for 2023 and $1.97 trillion for 2024—down from an estimated $2.34 trillion in 2022.

Consumer spending is unsustainable relative to disposable income

The stronger-than-expected GDP growth for 2022 doesn’t necessarily reflect the true strength of the overall economy. To prove this point, Fannie Mae economists point to consumer spending in the U.S., which is unsustainably high relative to household disposable income. 

Consumers are tapping into the savings they’ve built up during the pandemic period and are taking on more debt.

Given the unsustainable relationship between spending and household income, it’s only a matter of time before a period of consumer retrenchment—i.e., damage control–-drives a general contraction in the broader U.S. economy.

In November 2022, the personal savings rate went up from 2.2% to 2.4% but stayed near the record low of 2.1% set in 2005—compared to the typical pre-COVID range of 7% to 9%. 

Outstanding consumer debt as a portion of disposable income is also reaching new cyclical highs, and credit performance measures are weakening.

Finally, the general downward slide of home values and a growing expectation of future declines—as indicated in the Fannie Mae National Housing Survey®—point to a growing trend of conservation that will have a limiting effect on personal consumption.

Aside from housing, higher interest rates will likely discourage many from taking on payment plans for big-ticket items like cars and major home appliances.

While the dip in energy prices in recent months gave consumers some relief from inflation and left more of a gap between income and expenses at the end of 2022, it’s worth noting that the growth in personal consumption in November 2022 was also modest relative to gains in household income, suggesting consumers may be more reserved about spending this year.

Generally speaking, the higher the share of income that goes to monthly debt payments, the more anxious consumers will be to lighten that load by curbing any unnecessary spending.

The continued strength of the labor market suggests the economy has yet to contract, but Fannie Mae still expects a recession to begin in the first half of 2023, partly due to the consumer spending outlook mentioned above as well as early signs of strain in the labor market.

Payroll gains, while relatively strong, have decelerated to some degree in the past five months. 

On top of that, while they remain at low levels, continuing unemployment claims have been trending upward in recent months. And any significant movement off a cyclical bottom in this measure has historically set the stage for a broader economic downturn.

Housing supply remains tight

Overall, housing stock remains well below what U.S. demographic trends suggest is needed for the stabilization of home prices. On that basis, Fannie Mae does not anticipate a surplus of properties on the market, causing disorderly declines in home prices. 

It does expect a general environment of weaker home sales to continue, along with gradual declines in home prices, until we see more sustainable levels of affordability measures. Improvement in that area would then lead to a rebound in transactions. 

Existing home sales for December dipped below 4 million annualized units, and Fannie Mae is anticipating a sub-4 million pace for most of 2023. The tightness of the current market should help drive sales of new homes. 

With many existing homeowners still disincentivized to sell due to the lock-in effect of their lower mortgage rates, combined with overall affordability challenges, first-time home buyers are increasingly turning to new homes.

We need more single-family home completions

As much as we need more single-family homes on the market (and we do), a significant number of them are currently under construction: 777,000, as of November 2022. And while homebuilder confidence has improved recently, they continue to operate at margins that allow for additional price concessions and other incentives for buyers. 

For one, they’ve increasingly turned to mortgage-rate buy-downs to entice home buyers as they work through their current backlog of properties. Fannie Mae expects this and other incentives to continue as homebuilders work to clear the books and make room for new inventory. 

Since affordability is the main challenge keeping potential buyers at bay, builders are using the tools at their disposal to mitigate housing costs. 

A resilient home sales market and an increase in inventory

Unlike past housing cycles, Fannie Mae anticipates the new home sales pace will decline in 2023 but remain only modestly below pre-pandemic norms. The addition of more completed new housing units to the market will put downward pressure on prices for existing homes.

Economists predict a decline in new home sales in 2023 to 570,000 annualized units, down 12.7% from year-total levels for 2022—compared to a 22.4% decline in existing home sales.

Affordability will improve, but it will likely take multiple years

According to the Fannie Mae forecast, housing affordability will improve—but not solely through home price declines. The ESR Group expects a downward drift in mortgage rates, ending at a little over 6% in 2023 and dipping to around 5.5% in 2024.

Meanwhile, the gap between the 10-year Treasury rate and the 30-year mortgage rate remains historically wide at roughly 280 basis points as of January 20, 2023. 

This gap will likely compress over the next two years, approaching a more historically normal spread of 190 bps as interest rates stabilize and the Fed policy tightening stops. 

Finally, they expect nominal income growth to be stronger in aggregate over the next few years, compared to what happened during recent business cycles. So, some of the upcoming convergence in housing affordability will be accomplished through a rise in household incomes. 

The more buying power improves, the less home prices need to decline to reach a sustainable relationship between housing costs and household income.

In a recession, rents for multifamily units typically experience short-term contractions, though the extent of these contractions has varied.

They were much more significant, for example, during the recession of 2008, when unemployment soared to 10%, compared to the 2001 recession, when it rose to only 6%. 

A historically large number of multifamily housing units are currently under construction. Upon completion, these units will contribute to a softening in rents and, by extension, home price growth by making renting comparatively more affordable than buying a home.

While this is part of the whole picture of affordability improvement, Fannie Mae expects a meaningful slowing in multifamily construction this year, due to the recent slowing in rental price growth as well as rising vacancy rates and the higher cost of financing.  

2023 will see a 30% annual decline in single-family mortgage originations

In light of their downgraded home price outlook, Fannie Mae now expects $1.6 trillion in mortgage origination volume for 2023, a downgrade of $61 billion from last month’s forecast and a 30% annual decline.

It expects origination volume to grow by 20% to $1.97 trillion in 2024 as the housing market begins its recovery and mortgage rates gradually decline.

It also expects home purchase volumes to drop 23% to $1.28 trillion in 2023, down $51 billion from last month’s forecast and corresponding to lower projected home sales and weaker home price expectations. From there, purchase volumes may grow by 11% to $1.42 trillion in 2024 as the market recovers—but more slowly than economists had previously expected.

Fannie Mae also revised its forecast for refinance originations this month, mainly due to the lower expectation for home prices, which impacts cash-out refinances. It now expects to see volumes at $683 billion in 2022 and $356 billion in 2023—both below last month’s forecast.

In 2024, it expects refi volumes to bounce back to $545 billion as mortgage rates gradually drop.

Top takeaways for real estate agents

Keep this data handy and share everything that could help your clients make decisions they won’t regret.

Get to know their financial goals and where they want to be three or five years from now. Use that, in combination with the market data at your disposal, to help them make decisions that will serve those goals.

And keep your clients and prospects informed of any changes in the market that could impact them. Be the agent who makes it obvious with every (frequent) interaction that your client’s best interest is the number one reason you’re in this business.