Written by Breck Hapner
Editor’s note: Welcome to the Haven U.S. State of the Housing Market series. Every month, we will share an update explaining details and projections related to the U.S. housing market to keep you informed.
The U.S. economy exhibited a surprisingly strong start during the first two months of 2023, but it’s not expected to last. Fannie Mae just released their latest U.S. state of the housing market forecast on March 24, providing their predictions through 2024 for home sales, housing starts, home prices, and mortgage rates. But unlike previous reports, they have also included context and expectations of how the U.S. housing market may be impacted by the failures of Silicon Valley Bank and Signature Bank.
Of note in this forecast is Fannie Mae’s prediction of a modest recession during the second half of 2023, due to perceived U.S. banking system instabilities and a lack of consumer confidence. The definition of a recession is two consecutive quarters of negative “Gross Domestic Product” (GDP). For the second quarter of 2023, GDP is expected to be down 0.2 percent. In Q3, down 1.3 percent, then in Q4, down 0.6 percent.
If you navigate to the Fannie Mae Forecast landing page, and click on the “March Economic Forecast” link, you can view a PDF displaying economic data cited in this article.
Consumer sentiment is nearly always a powerful indicator of prevailing trends and perceptions among homeowners and homebuyers. According to a Fannie Mae February 2023 survey released March 7, 44 percent of consumers reported that it’s a bad time to sell a home and 24 percent expressed concern about losing their job in the next 12 months. Additionally, only 20 percent said it was a good time to buy a home.
That being said, broker and luxury property specialist Craig Hogan from Coldwell Banker Gold Coast maintains that something as simple as home presentation and staging still goes a long way in buying and selling a home, even in the current market. “Price is important but not the only factor,” Hogan said. “What we find is lifestyle, the product itself, sustainability, top level finishes, and attention to detail is still the style buyers are looking for.”
Fannie Mae’s March 24 forecast reiterates that home sales experienced substantial growth in February 2023, as home sales for existing houses actually increased by 14.5 percent compared to January 2023. As industry experts have already pointed out, the February 2023 increase was due to a pullback in mortgage rates. The Fannie Mae Economic and Strategic Research (ESR) Group noted that “recent mortgage application data suggest that last month’s level of home sales will be temporary,” leading to a decrease in March 2023 (and beyond) home sales.
Also referenced in the Fannie Mae March 24 forecast was the expectation that “home sales [will] remain subdued due to ongoing affordability constraints” and the “lock-in effect” displayed by current homeowners. In other words, homebuyers can’t afford to buy, and homeowners don’t have a lot of incentive to move. This is because they have rates that are less than 4 percent, and of course, current rates are around 6.5 percent.
But clients are still interested in new properties, despite obstacles. “First time buyers are at fairly high prices compared to my experience 25 years ago for sure,” Hogan said. “However, it’s all still the same journey and process. Just a bit more complicated if you don’t focus. Expectations should be clear and based on the reality of the market.”
Fannie Mae’s economic and housing outlook revised expected total home sales for Q1 2023 to reflect a higher upward trajectory, but Fannie Mae predicted 2023 total home sales (existing plus brand new home construction) to decline 18.4 percent from 2022. Fannie Mae’s previous forecast was for a 17.6 percent decline. Regarding 2024, Fannie Mae is predicting a partial rebound, with home sales in the U.S. rising 7.1 percent for the year. Their previous forecast for 2024 was a rise of 9.6 percent.
“Inventory is low. It’s confusing for some with so many listings on the market but sifting through what is really desirable is the work,” Hogan said. “Home sales may presently be in a slower cycle in some markets, but a commodity market will always adjust pricing. We counsel our clients on market realities, regardless of all the statistics swirling around in the industry.”
What Does the Data Say?
Let’s dive a little deeper to understand how recent economic woes, in addition to financial ramifications caused by the bank failures, have affected some aspects of the U.S. housing market. This can be seen in Fannie Mae’s latest reactionary data for housing starts, home sales, home prices, and of course, mortgage rates as well. On the Fannie Mae Forecast landing page, click on the “March Housing Forecast” link to view a PDF breakdown of their forecast through 2024.
Be aware that the Fannie Mae metrics are compiled on a seasonally adjusted, annualized basis. The figures are based on measured thousands of units.
And don’t underestimate the impact data carries in the industry, not only with buyers and sellers, but with real estate professionals as well. “Data is our chief focus, and we are the source of data for our clients,” Hogan said. “Is it time to consider selling? If not, when is the next best time to consider selling? Understanding that is important.”
Total housing starts, which include single-family and multifamily dwellings, decreased by 3 percent in 2022. Single-family total housing starts decreased by 10.6 percent, but in contrast, multifamily total housing starts increased by 15 percent. The big change is that in 2023 total housing starts decreased by 25.6 percent compared to 2022. This included a giant decrease of single-family as well as multifamily total housing starts as well. However, Fannie Mae is predicting a rebound for single-family total housing starts in 2024, increasing 12.5 percent compared to 2023. In contrast, multifamily will experience another decrease, down 14.5 percent from 2023. These are quarter-by-quarter changes, so in 2022 every quarter decreased from the previous quarter regarding single-family total housing starts. Then another decrease in Q1 2023, another decrease in Q2, as well as Q3. Then in Q4 2023, a bump, leading to increases throughout 2024 for single family housing starts.
In 2022, new single-family total home sales decreased 16.9 percent from 2021. Existing single-family condos/co-ops decreased by nearly 18 percent from 2021. New single-family total home sales declined by 5.1 percent this year, and existing home sales decreased by 20.1 percent on a year-over-year basis. This is a huge decrease of existing home sales in 2022, and the Fannie Mae forecast calls for a giant decrease again in 2023. But a reversal is predicted to happen in 2024 with an 8 percent increase for existing single-family total home sales, and a gain of 1.1 percent in 2024 for new single-family total home sales compared to 2023. Also, when looking at existing single-family total home sales, Fannie Mae is calling for a slight decrease in Q1 2023, followed by a decrease in Q2 and Q3, followed by an increase in Q4 2023. After that, Fannie Mae is predicting an increase every single quarter throughout 2024.
A lot of decreases are forthcoming for U.S. home prices. Real estate market predictions for home prices are based on Fannie Mae’s “Home Price Index” (HPI). Starting in Q2 this year through the entire year of 2024, Fannie Mae is calling for a decrease compared to the previous quarter for home prices. It’s been a roller-coaster. There was a 9.2 percent increase in home prices in 2022, but this decreased by 4.2 percent in 2023. Then, in 2024 compared to 2023, another decrease is expected, down by 2.3 percent. So, we are going to see a decline in price growth very soon, probably in the next month or two, with home sold prices in the U.S. going into negative territory compared to one year ago.
Fannie Mae’s 30-year fixed rate mortgage data for Q1 2023 is calling for the average mortgage rate to be 6.4 percent. It increases to 6.6 percent in Q2, holds steady in Q3, then decreases in Q4 to 6.4 percent. The Fannie Mae 2024 forecast shows a decrease in 30-year fixed mortgage rates every single quarter. The 2023 forecast for the entire year is 6.5 percent for an average 30-year fixed rate mortgage. Then, in 2024, it is expected to decrease to 5.9 percent. This mortgage rate decrease is good news for the home industry, but at a painful cost. Repeated rate hikes by the Fed have undermined the 10-year Treasury and devalued many once-profitable investments, leading to financial instabilities such as the recent bank failures. These are not positive tidings for the economy as an entity, which is feeling the effects of rampant inflation and sluggish growth, coupled with a now-faltering job market.
“Mortgage rates are a factor that is front and center, and like everything else in a commodity market, they will change,” Hogan said. “It is imperative to factor it in to assess your ability to pay, so it is important to understand how rates impact your buying decision in relation to the market as a whole.”
Fannie Mae provided some additional context regarding the recent bank “turbulence” and the effects on our macroeconomic growth, the U.S. housing market, and future mortgage activity. All this is outlined throughout three main points in the forecast, providing Fannie Mae’s insights into jumbo market mortgage lending, upcoming new home construction, and possible shrinking mortgage rates due to the 10-year Treasury rate falling.
Jumbo Mortgage Loans Tighten
Fannie Mae predicts single-family mortgage lending in the jumbo market may “tighten significantly, leading to fewer sales in related regions and market segments.” A “jumbo” is a high-balance mortgage loan for a higher-priced property, for instance, a 1.5M to 2M home price for a residence located in greater Los Angeles or inner New York City. Fannie Mae is saying mortgage loans for these types of properties could begin to suffer due to “liquidity stress [that] could limit home financing and therefore sales.”
Construction Activity Hampered
The report also cites further issues with construction activity, in addition to paralysis already present. There remains an elevated number of houses that are completed or at near-completion for homebuyers, and according to a Fannie Mae February 21, 2023 report, “These projects are likely to be prioritized by builders, rather than breaking ground on new ones.” So, in addition to a general lack of new builds, the situation may be further complicated because “development loans are heavily financed by regional and community banks, [creating] a drag on housing starts and multifamily residential sales.”
10-Year Treasury Rate Decline
Fannie Mae forecasts that “mortgage rates are likely to pull back in light of the 10-year Treasury rate falling.” As you may or may not know, the yield on the 10-year Treasury note is closely matched to fluctuations in mortgage rates. So, because the 10-year has been falling, Fannie Mae expects that mortgage rates will drop to relatively low levels as well. On a positive note, Fannie Mae says this should help the spring homebuying season. “Buyers currently on the sidelines may look to take advantage of lower rates as others did at the start of the year when rates fell from their peak of over 7 percent.”
Even though a decrease in mortgage rates could potentially cause a short-term increase in demand, Fannie Mae states, “Regardless of how the banking turbulence plays out, we continue to expect home sales activity to remain subdued for the remainder of 2023. Even if mortgage rates were to pull back to 6 percent, affordability remains highly constrained.”
“Markets will go up and down. At present, we have a lot swirling around us that impacts how we perceive buying, selling, and our knowledge of the markets,” Hogan said. “Adaptation is critical to our survival.”
In our April recap, Haven will take a further look at the numbers: how the current U.S. housing market is reacting to prevailing economic factors influencing real estate.