Strong Economy May Prop Up Home Prices, Mortgage Rates

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The surprising strength of the U.S. economy has quelled fears of a recession — but also means home prices are likely to keep rising and mortgage rates may not come down as quickly as previously expected, Fannie Mae economists said Thursday.

Last month, Fannie Mae economists were predicting this year might end up being the slowest year for home sales since 1995, as would-be homebuyers continued to grapple with affordability issues.

Recent declines in mortgage rates and the prospect that rates will fall below 6 percent next year have prompted forecasters at the mortgage giant to bump up their projections for 2024 and 2025 home sales — but only by a hair.

Home sales projected to grow 10% in 2025

Fannie Mae’s October housing forecast predicts 2024 home sales will total 4.77 million, up 30,000 units from September’s forecast of 4.74 million sales. If the latest forecast pans out, this year’s sales will surpass 2023 by 16,000 units — and last year will stay in the history books as the slowest year of the century.

Mark Palim

“While potential homebuyers have noticed the decline in mortgage rates over the last few months, they are equally aware that there has been little relief on the home price side, the other primary driver of unaffordability, particularly for first-time buyers,” Fannie Mae Chief Economist Mark Palim said in a statement.

“The timing of the long-expected pick-up in home sales activity, as well as a further moderation in home price appreciation, will depend in part on the willingness of current homeowners to relinquish their low mortgage rates by offering their homes for sale.”

Fannie Mae forecasters envision a bigger sales bump next year, with home sales surging 10 percent to 5.24 million. That’s 27,000 more sales than Fannie Mae projected in September.

Most of next year’s sales growth is expected to come from existing homes, which Fannie Mae projects will climb 11 percent, to 4.52 million. While 2025 sales of new homes are expected to remain essentially flat at 715,000, that’s up from 703,000 in last month’s forecast.

“We have upwardly revised our new home sales outlook given the decline in interest rates in our forecast this month, and we continue to expect the dearth of existing homes being listed for sale to help support new home sales and lead to a gradual increase over the forecast horizon,” Fannie Mae forecasters said.

Home price appreciation decelerating

Source: Fannie Mae housing forecast, October 2024.

Fannie Mae’s October housing forecast projects that home prices will continue to appreciate next year, but at a slower pace. Although home price appreciation is expected to slow to 3.6 percent by the end of next year, that’s up from the 3 percent Q4 2025 appreciation forecast in July.

[Fannie Mae economists produce their housing forecast on a monthly basis, but home price appreciation projections are only updated on a quarterly basis.]

Elevated mortgage rates have left many homeowners feeling the “lock-in effect” — they don’t want to put their home on the market because they don’t want to give up the low rate on their existing mortgage. While home sales are projected to rebound next year, the lock-in effect has kept inventory in short supply in many markets — and helped prop up prices.

“We are expecting deceleration of home price growth as affordability continues to be stretched and inventories of homes available for sale are rising in some regions,” Fannie Mae economists said in commentary accompanying their latest forecast. “However, the overall low level of available homes for sale is still bolstering home price appreciation, especially as income growth and employment remain strong.”

Mortgage rates headed below 6%?

Source: Fannie Mae housing forecast, October 2024. Mortgage Bankers Association Mortgage Finance Forecast, September 2024.

Fannie Mae forecasters predict rates on 30-year fixed-rate mortgages will drop below 6 percent in the first quarter of 2025 and continue falling to an average of 5.6 percent in Q3 and Q4.

But while that forecast was made public on Oct. 17, it was completed at the beginning of the month. Rates have been on the rise since then, which Fannie Mae forecasters say creates “upside risk” to their latest mortgage rate and home sales projections.

Since hitting a 2024 low of 6.03 percent on Sept. 17, mortgage rates have surged by 40 basis points, as strength in the economy is seen as allowing Fed policymakers to take a cautious approach to future rate cuts.

“On balance, the improved economic and labor market outlook are benefits to the housing market,” Fannie Mae forecasters said, although the recent rise in mortgage rates “is likely to keep home sales activity at subdued levels.”

While Fannie Mae’s forecast is for rates on 30-year fixed-rate loans to average 6 percent in Q4 (October, November and December), data tracked by Optimal Blue shows borrowers were locking in rates averaging 6.43 percent Wednesday.

Mortgage rates “have risen meaningfully following strong economic data, presenting upside risk to our rate outlook but also downside risk to our sales projection,” Fannie Mae economists acknowledged.