Freddie Mac offers positive, recession-free outlook on housing

Freddie Mac described its outlook on the housing market as positive, and while the U.S. economy will not enter a recession, high interest rates will affect both.

Its baseline scenario is for one Federal Open Market Committee rate cut to take place towards the end of the year. As a result Freddie Mac expects mortgage rates to remain elevated through most of 2024. The most recent Primary Mortgage Market Survey put the average for the 30-year fixed loan at 7.02%.

"While the U.S. economy has shown resilience so far, we expect higher interest rates to weigh on future growth, with the economy settling into a lower rate of growth in 2024 and 2025," the blog post from the economics team led by Chief Economist Sam Khater containing the forecast said.

Even it does not believe a recession will occur, "in our baseline, slower growth and a weaker labor market help to rein in inflation while the economy throttles back but avoids stalling," the post said.

When it comes to housing, Freddie Mac expects a small increase in home sales, which are still restrained by the lack of inventory. Low sales volume affects its forecast for mortgage originations; Freddie Mac no longer discloses dollar or loan count predictions.

Higher prices should result in increased dollar volume. "However, the combination of higher interest rates and limited inventory could limit purchase originations," the commentary said. "Additionally, we expect refinance origination volumes to decline as homeowners have already secured low rates, posing potential challenges in the refinance market."

But an analysis looking at generational data finds that the largest potential for future refinance activity currently is among millennials and Gen X members.

The most recent PMMS makes five consecutive weeks over the 7% mark, while it was above that level between Aug. 17 and Dec. 7 last year (with anecdotal evidence that originators were manufacturing loans above 8% during part of the period) and the weeks of Oct. 27 and Nov. 10 in 2022.

While 13% of the newest cohort of homeowners, Gen Z, currently has a mortgage rate over 7% — well above the all borrower market share of 5% — because this group is a small segment of the market, the number with these loans is small, at approximately 115,000.

"But the refinance potential is mainly concentrated among Gen Xers, with almost 700,000 Gen X borrowers holding mortgage rates [over] 7%," Freddie Mac said. "All generations combined, over two million mortgage borrowers have rates above 7%, with over 1.2 million borrowers from the Millennial and Gen X cohorts."

If rates drop under 6.5%, an additional 1.4 million borrowers, primarily in Gen X, gain the potential for a refinance.

Regarding purchase customers, millennials are more likely than Gen X or other cohorts to buy a home in the current rate environment.

"Gen Xers are generally several years away from retirement and have already transitioned from their starter homes to accommodate their growing family; therefore, they are less likely to move from their current homes," the post said, adding the likelihood they have a low mortgage rate will keep them "rate-locked for longer.

"Millennials, on the other hand — particularly the younger millennials — are more prone to changing jobs and transitioning into bigger homes as families grow, making them more likely to move regardless of their current low rates," Freddie Mac said.

But the economists added that interest rates are not the only factor, house prices are also important and that is an upside risk to the market, "which may keep the housing churn lower for longer."