“While some optimism appears to have crept into the housing sector, this suggests an improvement from very low levels of activity and there is a risk of further declines if rates reverse,” wrote economists at Fannie Mae in their latest report.
In early 2023, a combination of factors came to make the collapsed housing market feel even warmer. For starters, the early months of the year always see more seasonal demand. That demand this year has been helped by the average 30-year fixed mortgage rate falling from 7.37% in early November to 5.99% in early February, and the fact that homebuilders are now offering to buy a large number of mortgages.
However, we are starting to see the housing market rebound. Indeed, over the past three weeks, the average 30-year fixed mortgage rate has risen from 5.99% to date. 6.88%.
The rise in mortgage rates has been matched by seasonally adjusted mortgage purchase applications (see chart below) which fell this week to their lowest level since 1995.
For the full year 2023, Fannie Mae expects new and existing home sales volumes to decline 5.4% and 19.2%, respectively. This comes after a 16.5% decline in new home sales and a 17.9% decline in existing home sales.
There are two main reasons why Fannie Mae doesn’t think housing will recover in 2023.
First, Fannie Mae thought that high mortgage rates would continue to deter many buyers.
Second, Fannie Mae economists estimate that home inventory will remain limited as some sellers are eager to trade a 3% mortgage rate for a plus 6% mortgage rate. The lack of inventory, of course, will make it difficult for the rate of home sales to increase.
“Continued affordability constraints, the “lock-in” effect creates a financial disincentive for the majority of current homeowners with mortgages to move, and the tight inventory will continue to limit home sales… In addition, the 10-year Treasury has increased. meaning in the past few weeks, suggests that mortgage rates will begin to rise again,” Fannie Mae economists wrote in their latest report.
While Fannie Mae expects inventory levels to remain limited, it said tight inventory alone is not enough to stop future price corrections.
After a 2.5% decline in US home prices in the second half of 2022, Fannie Mae expects US home prices to fall another 4.2% in 2023. Then in 2024, Fannie Mae economists expect US home prices to fall another 2.3 %.
If Fannie Mae is right, this housing slump will see the national housing market go through a mild home price correction—not a home price crash. After all, if the price falls, the national house price will end 2024 still up 29% from the price level of March 2020.
Remember, whenever a group like Fannie Mae discusses US home prices, it’s a national aggregate. At the regional level, price movements differ.
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