Economists bullish on Fed rate cuts but less certain of boost to home sales

Mortgage industry economic forecasts have turned bullish on their rate outlooks, but that might not be enough to drive home sales higher than previously expected in the next two years.

Fannie Mae's August forecast now calls for a full year average rate of 6.7% for 2024 and 6% next year, down from 6.8% and 6.4% in July. For the fourth quarter, it expects 6.4% and 5.9% in that time frame; last month's outlook called for 6.7% and 6.2%.

The Mortgage Bankers Association dropped its rate call for year-end to 6.5% for 2024 and 5.9% in 2025 from the 6.6% and 6% they predicted in July.

Freddie Mac's commentary noted that the Federal Reserve is expected to cut short-term rates sooner rather than later.

"The anticipation of an upcoming rate cut is already influencing the market, leading to downward pressure on mortgage rates," the Freddie Mac outlook said. "As a result, we forecast mortgage rates to gradually decline in the coming quarters."

However, at least one Federal Reserve Board governor, Michelle Bowman, recently said she was not ready to sign off on a rate cut at the September meeting.

The prospect of lower mortgage rates might not be low enough to attract significant numbers of consumers back into the housing market, a recent Mphasis Digital Risk survey found, with the majority looking for loans to cost at least 5% and even down to 4%.

The forecasts were not so optimistic when it comes to home sales activity. The MBA forecast now calls for existing home sales of 4.16 million units this year and 4.4 million next year; in July, it expected 4.23 million and 4.49 million respectively.

Fannie Mae's latest estimate of 4.13 million during 2024 and 4.47 million home sales next year is down from July's estimate of 4.17 million and 4.54 million.

In theory, lower mortgage rates should reduce the lock-in effect on existing homeowners who are deciding whether or not to move, as well as improving affordability, said Mark Palim, Fannie Mae deputy chief economist, in a press release.

"Even with moderately lower mortgage rates, affordability remains close to historic lows due to the high level of home prices relative to incomes," Palim said. "We are therefore expecting continued sluggishness in home sales over the rest of the year."

The Freddie Mac economists, led by Sam Khater, are of the opinion that while the lock-in effect will be reduced as rates fall, the impact at best would be minimal given the number of current mortgagors with rates under 6%.

But it is expecting one segment of the purchase market to move forward.

"On the housing market, high mortgage rates and high home prices have led some prospective buyers to step back," the Freddie Mac posting said. "However, with the expectation of mortgage rates cooling further, we anticipate a significant surge in demand mainly from the first-time home buyers left at the margins."

It expects home sales to increase modestly the remainder of the year and 2025 while remaining below 6 million annually, as prices rise by 2.1% this year and 0.6% in 2025.

The forecast for total mortgage originations is for "a modest volume increase in 2024 and 2025," with refinance activity flat this year compared with 2023 while 2025 should see a slight improvement over the current year.

Fannie Mae's origination forecast for this year is now $1.699 trillion, relatively flat from $1.702 trillion in July. However, reflecting its latest attitude over home sales, the purchase portion was dropped to $1.325 trillion from $1.356 trillion. Refis are now predicted to reach $374 billion from $346 billion in July's forecast.

It elevated the 2025 forecast to $2.145 trillion from $2.113 trillion. But all of that gain will be from refinancings, which Fannie Mae increased to $627 billion from $563 billion; the purchase forecast was cut to $1.518 trillion from $1.55 trillion in July.

MBA economists were more pessimistic than Fannie Mae when making their monthly revisions for this year and next. The August outlook calls for $1.755 trillion of total volume, versus $1.777 trillion in July.

Purchase volume is now predicted to be $1.324 trillion, compared with $1.346 trillion. Refinancings were unchanged at $431 billion.

Next year, MBA now expects $2.065 trillion, with $1.474 trillion of purchases and $591 billion in refis. This compares with the July forecast of $2.106 trillion, with $1.515 trillion of purchase volume; it made no change to the refi prediction.