Fannie Mae’s Economic and Strategic Research (ESR) Group stated inflation is a key forecast concern in its November 2021 commentary. It upgraded its expectations for inflation in the near term to average 6.2 percent on an annual basis in the fourth quarter.
Recent price gains are expected to moderate over the coming quarters and temporary factors begin to wane. However, the build-up of stronger, underlying inflationary pressure suggests inflation will remain significantly above the Federal Reserve’s 2 percent target through 2023.
As a result, the Fed is expected to begin hiking its target rate in 25-basis-point increments beginning in the fourth quarter of 2022. But, if inflation continues to exceed expectations, there is an increasing risk the Fed will begin raising interest rates even earlier. The main factors that will determine the forecast is the pace of global supply recovery, the availability and cost of labor, and the extent of federal monetary and fiscal largesse.
“The Fed is in motion, pushed by inflation running ahead of their forecasts and looking less transitory than they had anticipated,” Fannie Mae Senior Vice President and Chief Economist Doug Duncan said. “They left themselves some room for policy change by committing to the speed of tapering assets for only two months, where adjustments could be made thereafter.
“Economic growth continues to slow, but not precipitously; and as rates have not yet reacted strongly, housing and mortgage activity remain very strong,” he continued. “Market participants will have one eye on the monthly inflation releases and the other eye on the Fed in the months ahead. How credible investors, business leaders, and consumers find the Federal Reserve’s evolving beliefs regarding the passing or sustained level of inflation and resulting monetary policy actions will be key – their choices will impact economic growth as well as housing and mortgage activity.”
The ESR group also published its expectations for 2023 real GDP for the first time, forecasting growth that is in line with the pre-pandemic domestic growth trend. The group projects the GDP to grow 2.1 percent in 2023, with the primary drivers to be inventory restocking by businesses and increased spending on services by consumers over the next few quarters.
Expectations for full-year 2021 and 2022 economic growth remained mostly consistent in November, with 2021’s projection revised downward by 0.1 percentage points to 4.8 percent and 2022’s projections revised slightly upward by the same amount to 3.7 percent, Fannie Mae stated.
Regarding housing, the ESR Group revised its expectations for 2021 home sales upward and its projection for 2021 home construction downward. Homebuilding continues to be restricted by supply chain bottlenecks and a lack of specialty trade labor, while mortgage demand remains strong. The group anticipates some of the homebuilding constraints to ease in the coming months, resulting in a forecast of 4.8 percent growth in single-family home starts and 13.9 percent growth in new single-family home sales in 2022.
Additionally, the ESR Group published its forecast on mortgage originations and purchase volumes to total $1.9 trillion in 2021 followed by 6.8 percent growth in 2022 to $2 trillion. As for refinances, the group projected $2.5 trillion in 2021 before slowing in 2022 and 2023 to $1.3 trillion and $1.1 trillion, respectively. The 30-year fixed mortgage rate is expected to average 3.3 percent in 2022 and 3.5 percent in 2023.