Fannie Mae ups forecast to two Fed rate cuts this year

Fannie Mae again revised its outlook when it comes to policy moves at the Federal Open Market Committee, rejoining those that expect two cuts in short-term rates this year.

However, housing and mortgage lending are unlikely to see any benefits right away.

Its July forecast now calls for the FOMC to act at its September and December meetings. A month ago, Chief Economist Doug Duncan cut his outlook to a single December rate cut.

The revision was a result of improved conditions around inflation along with slowing in the jobs market.

Fannie Mae now expects the Consumer Price Index to end the year with an annual inflation rate of 2.9% and the Personal Consumption Expenditures, the Federal Reserve's preferred metric, at 2.5%.

Unlike Duncan, Mortgage Bankers Association Chief Economist Mike Fratantoni has been steady in his expectations of two FOMC rate cuts, first at the September meeting and then in December.

Freddie Mac economists remain slightly more bearish, however.

"We anticipate a rate cut towards the end of this year if the job market cools off enough to keep inflation in check. This rate cut, if it occurs, could lead to a slight easing of mortgage rates in 2024, offering a glimmer of hope for prospective buyers," a July 19 blog post from the Freddie Mac Economics and Housing Research Group led by Chief Economist Sam Khater said.

A July survey of 49 economists by Wolters Kluwer found nearly universal support for a Fed rate cut this year, but the share that thought it would first come at the September meeting fell to 55% from 64% in June.

Right now, potential home purchasers remain on the sidelines waiting for affordability to improve, even as more inventory — from both new and existing homes — comes on the market, Duncan said.

"The slight decline in mortgage rates of late, following data pointing to gradually slowing economic growth, has not been enough to overcome the significant affordability constraints imposed on would-be homebuyers," Duncan said in a press release. "As such, despite more homes being listed for sale, actual home sales have not picked up."

Duncan's forecast was completed prior to the latest existing home sales data from the National Association of Realtors released on July 23, showing a 5.4% decline both month-to-month and annual, as home prices increased 4.1%. Inventory increased 3.1% during the period.

Price growth should continue to decelerate but not turn negative in the near term. But Duncan pointed to regional variations, especially when it comes to supply.

"For instance, many Sunbelt metros are currently seeing significant increases in for-sale inventories, in part due to new construction, while supply in much of the Northeast and Midwest remains extremely tight," Duncan said. "In aggregate, we expect these varied market conditions to lead to a slight decline in total new-home sales nationally for the full-year 2024, but a slight increase in existing homes sales."

Duncan adjusted his mortgage rate forecast to average 6.8% this year and 6.4% in 2025. For the fourth quarter of next year, he expects rates to fall to 6.2%, a change from last month's 6.3% projection.

Because of higher home prices, Duncan raised his 2024 purchase outlook by $14 billion from the June forecast, to $1.356 trillion.

But he downgraded the refinance outlook for 2024 by $26 billion to $346 billion, which Duncan said in a blog post is in line with recent data on mortgage applications from the Fannie Mae Refinance Application-Level Index. However, refi volumes should grow to $563 billion in 2025 as home prices continue to rise and mortgage rates gradually fall.

Next year, Fannie Mae now expects $1.55 trillion in purchase activity.

This will make total production of $1.702 trillion for 2024 and $2.113 trillion for 2025, compared with June's forecast of $1.714 trillion and $2.068 trillion respectively.

Freddie Mac no longer makes public its projections. However, it expects a pickup for both purchase and refi volumes through the end of 2025, calling for modest growth in both years.

Purchase volumes will not be "significantly higher than in 2023," as affordability issues will continue to hold back home sales activity, Khater said.

"On the refinance side, we expect refinance origination volumes to remain flat in 2024," Khater said. "However, we expect the drop in mortgage rates to below 6.5% in 2025 to prompt buyers who obtained higher rates in 2023 to refinance into lower rates," with the result being slight growth in that segment.

The MBA July forecast for 2024, which came out on July 19, also was reduced from the prior month, but by $19 billion versus the $12 billion change at Fannie Mae.

Its purchase dollar volume prediction is now $1.346 trillion, versus $1.374 trillion one month earlier. But the 2024 refi outlook is $9 billion higher at $431 billion.

The 2025 forecast was raised to $2.106 trillion from $2.084 trillion on improved purchase and refi expectations.

MBA's forecast for 2026 was up by $23 billion versus June to $2.298 trillion, nearly all of the gain coming from purchase activity.