Mortgage rates to stay over 6% for next two years, Fannie Mae says

In a sign of how expectations can shift suddenly in the mortgage industry, Fannie Mae increased its rate expectations for this year by 0.5 percentage points in its March housing and economic outlook.

Not only that, but rates will not fall below 6% in 2025, according to the government-sponsored enterprise's forecast.

"Hotter-than-expected inflation data and strong payroll numbers are likely to apply more upward pressure to mortgage rates this year than we'd previously forecast, as markets continue to evolve their expectations of future monetary policy," Chief Economist Doug Duncan said in a press release. "Still, while we don't expect a dramatic surge in the supply of homes for sale, we do anticipate an increase in the level of market transactions relative to 2023 — even if mortgage rates remain elevated."

Those factors have the market now expecting the Federal Open Market Committee, meeting on Tuesday and Wednesday, to hold off on any short-term rate reductions until later this year.

That in turn is impacting the 10-year Treasury yield, which led Duncan to raise his fourth quarter 2024 rate forecast to 6.4% from 5.9%. For the same period next year, he now sees rates at 6%, versus 5.7%.

The 10-year yield was at 4.31% at noon on March 19; the yield was as low as 3.82% on Feb. 1.

Duncan reduced his 2024 originations outlook to $1.76 trillion from $1.91 trillion in the February forecast, with originations reduced to $1.37 trillion from $1.46 trillion. Refinance volume is now expected to come in at $397 billion from $459 billion. Fannie Mae estimated that total volume in 2023 was $1.47 trillion, with $1.22 trillion coming from home purchase originations.

In 2025, Fannie Mae now expects $2.18 trillion of volume, versus $2.36 trillion one month ago.

Separately, mortgage applications for newly constructed homes increased 15.7% year-over-year and by 1% month-to-month in February, the Mortgage Bankers Association said. The numbers from its Builder Application Survey are not seasonally adjusted.

Rising rates actually hampered activity during the month, but a competitive market kept volume up, said Joel Kan, deputy chief economist, in a press release.

"The average loan size increased to its highest level since March 2023 at almost $406,000, but it was still below the record high in MBA's survey of more than $436,000 in April 2022," said Kan. "The Federal Housing Administration share of purchase applications, which provides a read on first-time homebuyer activity, increased to 25.7%, indicating that first-time buyers continue to turn to new homes due to the lack of affordable existing home options."

New single-family home sales were running at a seasonally adjusted annual rate of 689,000 units, down 1.6% from January's pace of 700,000 units. Unadjusted, an estimated 62,000 new home sales occurred in February, down 1.6% from 63,000 the prior month.

Besides the FHA share at 25.7%, conventional loans made up 63.9% of the volume, Department of Veterans Affairs comprised 10.1%, and the U.S. Department of Agriculture program just 0.3%.

Meanwhile, the FHA made it official — boosting the loan limits for Title 1 manufactured housing mortgages. This is the first increase in 15 years, but it won't be the last, as the agency promised to recalculate the limits annually to keep pace with home price changes.

Starting March 29, the limits are $105,532 for a single-section manufactured home and $193,719 for a multisection dwelling. The lot loan limit is $43,377.

"Updating the Title I loan limits was the next critical piece in our ongoing efforts to make the Title I Manufactured Home Loan Program work for lenders and homebuyers for whom manufactured housing offers an affordable way to meet their housing needs," said Federal Housing Commissioner Julia Gordon in a press release. "We hope these changes will prompt more lenders to consider using the Title I program to meet the financing needs of consumers purchasing or refinancing manufactured homes."

Manufactured housing is seen by advocates as a tool to relieve the inventory shortage.

That shortage has kept home prices elevated. But the February report from First American Data & Analytics found that while prices increased 6.3% year-over-year, it was the slowest annual pace since October 2023.

The increase from January was 0.7%.

The second consecutive decline in the monthly pace clarifies the trajectory for price movements, First American Chief Economist Mark Fleming said.

"In February, our preliminary estimate of annualized appreciation dropped by almost a full percentage point," Fleming said in a press release. "The last time there was a slow-down of this magnitude was in early 2023 when the Fed was aggressively raising interest rates."

While indications are that the supply of homes for sale is on the rise, inflation is keeping prices elevated, he said.

Still, "the relative increase in homes for sale is a welcome sign for prospective home buyers and seems to be helping to normalize house-price appreciation, an added benefit heading into the spring home-buying season," Fleming said.