Fannie Mae’s Economic and Strategic Research (ESR) Group forecasted a shift in the economy as historically high home price growth is expected to moderate.
However, the home price growth is still expected to add to overall inflation pressure. The group projected the full-year 2021 real GDP growth to be 7 percent, but compositional and temporal shifts are expected for the underlying sources of economic growth.
The ESR group updated its forecast to reflect a larger share of the 2021 economic growth occurring in the second half of 2021. Second quarter growth is expected to be around 8.1 percent, down from last month’s projected 10.1 percent. Third and fourth-quarter projections were revised to 7.1 percent and 6.6 percent, respectively, up by 0.7 and 1.2 percentage points. The group also expects business inventory investment and government spending will account for an increasing share of near-term economic growth and consumer spending will shift away from goods and toward services.
Future COVID-19 developments, supply chain and labor shortages, and inflation risks are all factors that can weigh the forecast down. Additionally, higher-than-consensus levels of inflation are forecasted through the end of 2020. This is because of the anticipation that some of the more transitory price pressures will give way to housing-driven inflationary pressure.
“While recent home price growth has been historically high, we’re forecasting further home price appreciation to moderate through the remainder of the year and into 2022,” Mark Palim, Fannie Mae vice president and deputy chief economist, said in a release. “On the supply side, we think homebuilders will be able to increase production as supply chain disruptions and labor shortages alleviate, which should add to the inventory of new and existing homes available for sale.
“On the demand side, we expect the increase in housing demand we saw over the past year to ease, as the impact of unique recent factors lessens, including adjustments to accommodate pandemic-related remote work arrangements, stimulus checks bolstering household savings, and record-low mortgage rates.”
The group upgraded its home price forecast, as measured by the Federal Housing Finance Agency’s purchase-only index, to 14.8 percent annualized in 2021, a significant increase from the previous forecast of 8 percent. The ESR group also expects home price growth to moderate to 5.1 percent in 2022. The interest rate forecast also was lowered, and 2021 mortgage originations are projected to be $4.2 trillion, up from last month’s projection of $4.1 trillion, with purchase and refinance originations activity projected to be higher.
“[D]emographic trends remain favorable for a strong housing market over the next few years, and, combined with the chronic undersupply of homes built over the last decade, upward pricing pressure is likely to remain through the forecast horizon – just not at the rate seen this spring,” Palim said. “Nevertheless, we expect home price growth to become one of the more persistent drivers of inflation going forward, as other, more transitory factors diminish.”