Fannie Mae: The housing market just pulled a head fake

“Although some optimism appears to have crept into the housing sector, it represents a rise from a very low level of activity and risks falling again if interest rates reverse,” Fannie Mae economists wrote in their latest report.

In early 2023, a combination of factors came together to make the slumping real estate market feel a little warmer. For starters, there is always more seasonal demand in the first few months of the year. That surge in demand this year has been helped by the average 30-year fixed-rate mortgage rate, which fell from 7.37% in early November to 5.99% in early February, and the fact that homebuilders are now offering significant mortgage rate buybacks.

However, we are already starting to sour again on the backdrop to the real estate market. In fact, the average 30-year fixed-rate mortgage rate has rebounded from 5.99% over the past three weeks 6.88%.

This rebound in mortgage rates has already coincided with seasonally adjusted mortgage applications (see chart below) falling to their lowest level since 1995 this week.

For full-year 2023, Fannie Mae expects the volume of both new and existing home sales to fall by 5.4% and 19.2%, respectively. This comes after new home sales fell 16.5% last year and existing home sales fell 17.9%.

There are two main reasons why Fannie Mae doesn’t think housing construction will recover in 2023.

First, Fannie Mae believes high mortgage rates will continue to deter many buyers.

Second, Fannie Mae economists believe housing supply will remain constrained as few sellers seek to swap their 3% fixed mortgage rate for a plus 6% mortgage rate. Of course, this lack of inventory would make it harder for home sales to pick up.

“Ongoing affordability constraints, the ‘lock-in’ effect creating a financial drag for the majority of current homeowners with mortgages to relocate, and still-scarce inventory are expected to continue to limit home sales… In addition, the 10-year Treasury bond gains have gained significant traction in recent weeks, suggesting mortgage rates are likely to rise again,” wrote Fannie Mae economists in their latest report.

While Fannie Mae expects inventories to remain low, it says tight inventories alone will not be enough to halt the home price correction.

After US home prices fell by 2.5% in the second half of 2022, Fannie Mae expects US home prices to fall another 4.2% in 2023. In 2024, Fannie Mae economists then expect US home prices to fall another 2.3%.

If Fannie Mae is correct, this housing slump would cause the national housing market to undergo a mild housing price correction — not a full-blown housing price crash. After all, if these price declines occur, national home prices in 2024 would still be 29% above the March 2020 price level.

Remember, whenever a group like Fannie Mae discusses US home prices, it’s a national aggregate. At the regional level, price movements vary.

Want to stay up to date on the real estate market correction? Follow me on Twitter at @NewsLambert.

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