Fannie, Freddie boost 2022 outlooks despite likely rate rise

Economists at the government-sponsored enterprises diverge on their year-over-year forecasts for industry volume, with Fannie Mae predicting a slight decrease, but Freddie Mac looking at increased origination activity.

Both companies are now predicting over $4 trillion in total volume this year, as Freddie Mac foresees $4.46 trillion in total volume this year, up from the $3.93 trillion it predicted in July.

It now puts 2020 volume at $4.44 trillion; three months ago, it had estimated $4.1 trillion for last year.

For 2022, Freddie Mac raised its forecast to $3.11 trillion, compared with July's $2.63 trillion.

"Even as mortgage rates are expected to increase and home prices continue to rise, homebuyer demand remains steady as inventory issues have slightly improved," Sam Khater, Freddie Mac chief economist, said in a press release. Therefore, in 2022, we expect strong house price growth to lift home purchase mortgage originations by more than $500 billion from 2020."

Freddie Mac predicts $1.92 trillion in purchase volume this year and $2.11 trillion next year, compared with $1.59 trillion in 2020.

Any impacts on housing due to the Federal Reserve's likely tightening of U.S. monetary policy through the end of 2022 will be offset by current market conditions remaining the status quo, Fannie Mae's latest forecast said.

For the third consecutive month, Fannie Mae reduced its gross domestic product growth expectations for 2021, this time to 4.9% from 5.4% in September. Meanwhile, it increased its inflation projections to an annual rate of 5.7% from 5.4%.

"While we still view the supply chain disruptions and, to a lesser extent, labor market tightness as largely transitory, we now expect both to last even longer than we'd previously forecast — and also likely longer than the Federal Reserve anticipated," Doug Duncan, Fannie Mae senior vice president and chief economist, said in a press release. "Combined with our expectation that inflation will run above-target over the forecast horizon, we foresee growing clamor from market participants for the Fed to begin tightening monetary policy: first by tapering asset purchases and then, in the fourth quarter of 2022, by raising the federal funds rate target range for the first time since December 2018."

That tightening should lead to mortgage rates rising to 3.4% by the fourth quarter of 2022, 0.2 percentage points higher than Duncan anticipated in his September forecast.

"Even a modest tightening of monetary policy would of course impact housing, but we expect the effects to be largely muted given current market conditions," Duncan said. "Mortgage rates may rise in response to the tighter environment, but we expect the severe shortage of homes for sale to remain the primary driver of strong house price appreciation through at least 2022, limiting interest rate effects on home sales and home prices."

Duncan increased his 2022 origination forecast to $3.33 trillion from $3.25 trillion one month ago.

His projection for this year was cut slightly to $4.32 trillion from $4.33 trillion. However, Duncan did revise his figures for 2020 down to $4.37 trillion; in September, he pegged last year's market at $4.57 trillion. That means this year's total volume will be down by just 1%, rather than the 5% year-over-year change in the September forecast. In the past, industry economists have revised prior activity based on government data releases.

When house prices rise, so do home sales, but this relationship is not so straightforward, said First American Chief Economist Mark Fleming in this month's Potential Home Sales Model release.

"While an existing homeowner may have more purchasing power because the equity in their home has surged as prices appreciated, the price of the bigger and better home they are interested in has also increased. And even if the owner has the purchasing power, it's hard to buy what's not for sale," said Fleming. "While inventory for new and existing homes has modestly increased in recent months, it remains near historic lows."

And now that rates are expected to rise, existing homeowners have even less motivation to list their property and shop for a new one.

"Rising mortgage rates means it costs more to borrow the same amount that the homeowner owes on their existing mortgage," said Fleming. "The more the prevailing market mortgage rate exceeds the homeowner's existing mortgage rate, the larger the lock-in effect."