Fannie Mae, optimistic, forecasts an improving housing market

Fannie Mae’s Economic Strategic Group (ESR) recently updated their forecast for the housing market. Their new forecast sees housing and the broader economy continuing to improve as year-end 2020 reports come in. Further, the group expects the recovery to continue in 2021, though at a more moderate pace than was seen in the housing rebound of the third quarter (Q3) of 2020.

In contrast, according to a recent firsttuesday poll, the majority of readers believe we are heading into a second decline in 2021 rather than a sustainable recovery.

Editor’s note: Share your opinion of our present recession course, vote on the poll here.

Fannie Mae’s reasoning for their more positive forecast is that, as virus concerns fade, consumer spending is rising. Also called virus fatigue, many individuals are tiring of the cautious limiting of in-person activities. Now, even though the virus continues to surge across the U.S., people continue to eat at restaurants and shop — for goods and for houses.

However, Fannie Mae cautions that further lockdowns to prevent the spread of COVID-19 will harm the economy in the near-term. Even then, they believe most households are in a strong enough financial position to weather any brief economic slowdowns in 2021. Fannie Mae’s housing forecast also remains strong, mostly due to the relief brought by historically low interest rates.

Their pricing forecast for the next two years continues to be positive, though they expect growth will slow in 2021 and further slow in 2022. At the same time, Fannie Mae anticipates home sales volume to gradually increase through 2022.

A more realistic forecast for 2021-2023

Fannie Mae’s optimism warms the heart, but there’s not any real kindling to keep it going.

Some of the negative factors Fannie Mae has glossed over include:

• the expirations of the federal eviction and foreclosure moratoriums at the end of 2020;
• the lack of confidence in a second round of government stimulus, very much needed as millions of Americans still remain jobless, including 1.4 million who are without a job here in California compared to a year ago, as of October 2020; and
• increasing rates of 90+ day mortgage delinquencies — including 5% of all residential mortgages and 11% of Federal Housing Administration (FHA)-insured mortgages in Q3 2020, according to the Mortgage Bankers Association (MBA).

Housing has outperformed expectations in 2020 mostly due to the significant home price bump, despite the economic recession. Here in California, home prices are 9% higher than a year earlier as of September 2020. The price bump is due to both 2020’s consistently falling interest rates and decreased multiple listing service (MLS) inventory. However, neither of these factors will continue in 2021.

First, the end of the foreclosure moratorium will slash home prices, scheduled for December 31, 2020. In the weeks that follow, the majority of homes with serious delinquencies will begin the foreclosure process and the inventory will be flooded with distressed sales, at which time real estate speculators will return in large numbers.

Further, while mortgage interest rates have helped support the mortgage market as well as boost home prices, the impact of record-low interest rates is gradually fading. That’s because interest rates will not go much, if any, further than their current lows, causing buyer purchasing power to flatten. Without the enticement of ever-falling rates, homeowners and homebuyers will simply get used to and even come to expect the benefits of today’s low rates.

When interest rates do rise consistently, the effect will be a cut to buyer purchasing power and a downward force on home prices. The Fed anticipates inducing interest rates to increase around 2023.

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