Fannie Mae tweaks origination forecast on inflation worries

The effects of inflation and rising interest rates are the driver of the tweaks Fannie Mae made to its mortgage and economic forecast for January.

Fannie Mae now projects that 2021 closed with $4.44 trillion of mortgage originations, down from $4.45 trillion predicted in the December forecast. Purchase volume estimates were reduced by $20 billion to $1.86 trillion, while refinancings made up $2.58 trillion, $5 billion higher than the December estimate.

For this year, Fannie Mae cut its forecast to $3.34 trillion from $3.35 trillion, with the refinance outlook cut to $1.29 trillion from $1.31 trillion. But the government-sponsored enterprise also increased its purchase prediction for 2022 to $2.05 trillion from $2.03 trillion. The 2023 forecast was increased to $3.14 trillion from $3.11 trillion last month.

Even with the boosted purchase volume forecast, lower levels of housing affordability will affect the home sales market.

The Federal Reserve is speeding up the pace of its planned reduction for monetary accommodation in the U.S. economy. That is leading to higher bond yields, with the 10-year Treasury, the benchmark for the 30-year fixed rate mortgage, rising to 1.87% on Jan. 18 from 1.51% on Dec. 31 and 1.09% on Jan. 19, 2021.

"Currently, we expect inflation to run above the Fed's 2% target through 2023, and for the Fed to respond by tightening over that period," Doug Duncan, Fannie Mae's chief economist, said in a press release. "The resultant rise in interest rates will likely put additional stress on housing affordability measures vis-à-vis higher mortgage rates for consumers and the continued, though decelerating, rise in home prices."

A large percentage of consumers took some or all of their economic stimulus payments and placed them into their savings, which increased the possible down payment or housing price tier for some home shoppers, or both.

"While consumers still have a significantly elevated level of savings, the rate of saving has fallen such that, over time, we believe 'excess' saving will likely be eroded and affordability increasingly constrained," Duncan said. "We observe an early indication of this in recent increases in debt-to-income measures associated with incoming mortgage originations."

But rising rates are creating downside risk to this forecast.

In the January forecast, the 30-year FRM ended the fourth quarter of 2020 at a 3.1% average, and should rise to 3.4% by the fourth quarter of this year and 3.5% by the end of 2023.

"Based on more recent data, we estimate the mortgage rate could be approximately 20 basis points higher over the forecast horizon," an accompanying blog posting said. "We estimate that purchase volumes under such a case could be about 2%, or $33 billion lower in 2022, all else equal, and that refinance volumes could be about 10% to 15% lower in 2022.”