Fannie Mae makes sizeable cuts to purchase mortgage estimates

Fannie Mae significantly reduced its second and third quarter home sales estimates as supply-side factors — such as the low number of listings for existing residences and limits on new construction — run up against demand.

Those trends also play into the inflationary impact housing is likely to have on the U.S. economy.

The government-sponsored enterprise's June forecast expects home sales to run at an annualized pace of 6.6 million units in the second quarter and 6.5 million in the third, compared with May's forecast of 6.9 million and 6.7 million respectively.

For the full year, Fannie Mae predicts an annual run rate of 6.7 million home sales, up by 4.2% over 2020's 6.5 million. But in May, Fannie Mae predicted 6.9 million units in 2021, which would have been a gain of 6.3% over the previous year.

"Demographic factors remain favorable for a strong housing market and many of the supply constraints that homebuilders face are likely to persist in the near term, so this upward pricing pressure is not likely to be as transitory as many of the current inflation drivers," Fannie Mae Chief Economist Doug Duncan said in a press release.

On the other hand, housing has been an intermediate-term inflation hedge in past cycles. "If interest rates rise to reflect the increase in inflation based on an expectation of tighter future monetary policy, home sales would likely moderate along with house price appreciation," Duncan continued.

While housing starts are expected to continue at their fastest pace since 2013, Duncan now predicts 1.62 million units for 2021, a 17.2% year-over-year increase; in May he forecasted that 1.65 million units would be built, a 19.3% increase over 2020.

Single-family housing construction authorizations fell a modest 0.32% in May compared with April, BuildFax said in a separate report. There was a 25.88% year-over-year increase over a pandemic-affected May 2020, while the trailing three-month outlook (March to May 2021) increased 19.70% over the prior year.

However, the building supply shortage is likely disrupting housing start volume, which typically lags behind permit authorizations. "Lumber prices appear to be limiting housing starts at a time where ramping up pace of construction is imperative to get would-be homesellers and buyers back in the market," said Jonathan Kanarek, managing director at BuildFax.

But in a separate commentary covering today's Census Bureau housing starts data that came out after Fannie Mae's forecast, Duncan said "with lumber prices falling in recent weeks and a strong backlog of homes sold-but-not-yet-started, we expect some upward movement in single-family starts in the coming months as delayed and put-off projects are initiated."

As a result, Duncan cut his purchase origination forecast for 2021 in the June report to $1.81 trillion from $1.84 trillion in May. This included reducing the second quarter forecast to $489 billion from $500 billion, the third quarter outlook to $489 billion from $513 billion and the fourth quarter projection to $458 billion from $461 billion. However, his total originations prediction increased to $4.1 trillion from the prior $4.08 trillion, as refinance volume is now expected to be higher than previously forecast in each of the three remaining quarters of this year.

Fannie Mae now forecasts just shy of $2.3 trillion in refi production this year, up from $2.24 trillion one month ago. Rates for the 30-year fixed mortgage should remain at 3% for the second and third quarters, before rising to 3.2% by the end of the year.