Consumers are spending more than Fannie Mae previously expected, leading the mortgage giant to increase its housing market and economic growth predictions mid-year, according to its forecast report. However, it also says a slowdown is on the horizon.
Fannie Mae now expects economic growth of 7.1% for the year, a slight upward revision from its previous 7% growth forecast, according to the June 2021 commentary from its Economic and Strategic Research Group.
But despite this strong growth prediction and upward revision, the group does expect growth to slow – dropping to 5.5% by the fourth quarter of this year and to 2.2% by the fourth quarter of 2022.
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Fannie Mae predicts that because housing prices are rising, it could drive inflation increases for the next year and a half, causing inflation to hold at 5% by the end of the year and dropping to 3% by 2022. The is well below the Federal Reserve bank’s 2% target.
At its last meeting, the Federal Reserve elected to hold the federal funds rate – which indirectly influences the direction of mortgage rates – at 0%. However, more members were predicting two possible rate hikes by the end of 2023, an increase from its previous predictions. But if inflation is higher than the Fed members are expecting, it could force them to raise interest rates even sooner.
"The downside risks associated with potentially persistently higher inflation, including a more aggressive pace of monetary tightening by the Federal Reserve, could drag on growth over the forecast horizon," Fannie Mae said in its forecast report.
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Despite rising home prices, the buyer demand for real estate remains strong. However, there is not enough housing supply to keep up with buyer demand, causing Fannie Mae to decrease its home sales predictions to 6.6 million homes sold for the second quarter of this year and 6.5 million homes sold for the third quarter, down from its previous forecast of 6.9 million and 6.7 million, respectively.
But Fannie Mae also said it expects mortgage rates to remain low, noting the 30-year mortgage rate will average 3% by the end of this year and 3.3% by the end of 2022.
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"Strong demand for housing continues to run up against a long-running lack of supply," said Doug Duncan, Fannie Mae senior vice president and chief economist. "We’ve seen this disconnect lead to rapid house price gains over this past year, but we believe it will soon reveal itself within inflation measures as well. Demographic factors remain favorable for a strong housing market and many of the supply constraints that homebuilders face are likely to persist in the near term, so this upward pricing pressure is not likely to be as transitory as many of the current inflation drivers.
"Nonetheless, in the past housing has served as an intermediate-term inflation hedge," Duncan said. "If interest rates rise to reflect the increase in inflation based on an expectation of tighter future monetary policy, home sales would likely moderate along with house price appreciation."
Despite supply and demand issues, home sales remain strong and interest rates are at historic lows. While future rate hikes could temper home sales slightly, this appears to likely be months out. Reach out to Credible to speak to a home loan expert and get your mortgage and personal finance questions answered today.
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