Fannie Mae’s Economic and Strategic Research Group (ESR Group) announced in a report on Dec. 20 that home sales across the United States are expected to rise to 7.1 percent at the end of 2021, but will decline over the next two years as limited stock, combined with higher mortgage rates and inflation, will cool the housing market.
The ESR Group upgraded its home sales growth projection for 2021 to 7.1 percent, citing an expected strong year-end surge in home buying—higher than the 5.3 percent projected previously.
The increase is just below 2020’s 7.3 percent jump.
However, the report forecasts a decline in home sales growth next year by 1.4 percent due to “limited listings and growing affordability constraints.”
The group revised its full-year 2021 economic growth projection to 5.5 percent, up 0.7 percent from last month’s projection, due to stronger than anticipated consumer spending during the holiday season and inventory investment data.
The ESR Group’s primary economic concern affecting the U.S. housing market for 2022 is rising inflation and how policymakers and the market will respond to it.
“While the economy picked up steam late in the year, unfortunately, so did inflation, and the market expects the Fed to recalibrate its monetary policy as a result,” said Doug Duncan, Fannie Mae senior vice president and chief economist.
“The public registered its ill-will toward inflation in our most recent National Housing Survey, which found that 70 percent of consumers believe the economy to be on the wrong track—the most since 2011, when consumer sentiment was weighed down by the aftermath of the Great Recession.
“The Fed recently acknowledged that inflation is unlikely to be transitory, and it will now attempt to engineer a soft landing, one in which inflation moderates to acceptable levels and economic growth decelerates but doesn’t contract. Whether the Fed is able to thread this historically difficult policy needle is shaping up to be one of the most consequential economic storylines of 2022.”
The report says that “while there’s significant room for uncertainty regarding the near-term path of inflation,” it’s projected to peak at approximately 7 percent in the first quarter of 2022 “before gradually decelerating to 3.8 percent by year-end.”
The ESR Group says that it expects the Federal Reserve to begin a more aggressive pace of monetary tightening in the new year as part of its effort to combat rising price pressures without tipping the economy into recession.
They believe that tightening monetary policy to combat inflation “will combine with ongoing supply issues and still-appreciating home prices to slow sales activity.”
The group is forecasting interest rate increases in the second and fourth quarters of 2022, and then quarterly through 2023, but is also predicting the high probability of a third rate increase in 2022.
The ESR report is expecting home mortgage rates to drift upward in 2022 by an average of 3.2 percent, due to additional home price appreciation putting a growing constraint on home sales.