While there is still a considerable amount of uncertainty surrounding the implications of the Russian invasion of Ukraine on the housing market, the picture is getting a bit clearer for experts at Fannie Mae. In a recent report, forecasters from the government sponsored enterprise, note that the geopolitical event has already started weighing several economic hurdles influencing housing and the U.S. economy.
“The Russian invasion of Ukraine further complicates an economic landscape still affected by a pandemic, historically large monetary and fiscal policy responses, and the ensuing 40-year high inflation rate,” read a March 17 statement by Fannie Mae forecasters who recently revised economic projections for 2022.
Fannie Mae’s Economic and Strategic Research (ESR) Group dropped their projections for full-year 2022 real GDP growth from 2.8% in February to 2.3% this month in the wake of the Federal Reserve announcing that it would begin raising interest rates.
The first of potentially six rate hikes for the year occurred on March 17, and media reports suggest that it could be as many as eight by early 2023.
The forecast change reflects “substantial downside risks to both the macroeconomic and housing outlooks.”
“A slowing economy, decades-high inflation, expired fiscal stimulus, tightening monetary policy and now Russia’s invasion of Ukraine are all weighing on the health of the U.S. economy,” said Fannie Mae SVP and Chief Economist, Doug Duncan, in a statement.
He went on to say that trade disruption in energy, agriculture and other commodities are putting upward pressure on inflation and “making an already difficult task for the Federal Reserve even more challenging.”
Before the geopolitical conflict, inflation hit a 40-year high of 7.9% in February, with increases in energy and food prices playing a significant role in the increase.
Though the Fed was tight-lipped about the timeline and extent of rate hikes, the Central Bank telegraphed increases were on the horizon for months as they sought to combat elevated inflation.
The general narrative by real estate experts has been that the Ukraine situation wouldn’t directly harm the housing market. However, Fannie Mae acknowledged that geopolitical and monetary policy uncertainty adds risk to the housing outlook.
Fannie Mae expects a decline of 4.1% in total home sales in 2022—up from its initial forecast of a 2.4% drop. Existing home sales jumped in January by 6.7% to an annualized pace of 6.50 million units, which Fannie Mae suggested as the peak for the metric this year.
The surge in housing activity is partially due to a rush of prospective buyers trying to lock in lower mortgages before expected increases in interest rates. As the dearth in housing supply and affordability challenges continue, experts predict a considerable slowdown in existing home sales.
“We expect existing sales to trend downward to a pace of about 5.6 million annualized units by the end of the year, compared to the Q4 2021 average of 6.2 million units,” Fannie Mae forecasters said in the report.
Recent data from the National Association of REALTORS® (NAR) shows that existing home sales have started to retract in February, dropping 7.2% from January.
“Housing affordability continues to be a major challenge, as buyers are getting a double whammy: rising mortgage rates and sustained price increases,” said Lawrence Yun, NAR’s chief economist in a recent statement. “Some who had previously qualified at a 3% mortgage rate are no longer able to buy at the 4% rate.”
Yun noted in NAR’s recent report on existing home sales that rising rates and escalating prices have prevented many consumers from making a purchase.
“The sharp jump in mortgage rates and increasing inflation is taking a heavy toll on consumers’ savings,” he said. “However, I expect the pace of price appreciation to slow as demand cools and as supply improves somewhat due to more home construction.”
Pending home sales also fell by 5.7% in January, while purchase mortgage applications sank in February by 11.9%, marking additional shifts leaning toward moderation in the market that the ESR Group expects to carry on throughout the year.
“With affordability declining, a significant further rise in mortgage rates would price many buyers out of the market,” read an excerpt from the report. “In the short run, the prevalence of bidding wars and a lack of inventory for sale leads us to believe that further rate increases will have a comparatively muted effect on sales relative to the historical rate-change relationship.”
Transactions are still expected because of a “reserve of currently outbid buyers” who will replace buyers squeezed out now. However, according to the report, the long-term market impacts may likely mean an overall retraction in sales activity.
“In our view, this will likely lead to fewer bidding wars and decelerating price gains,” Fannie Mae’s report stated. “We believe this comparative resilience will be temporary, though, as eventually this pool will be exhausted. This is especially true given we expect that many recent purchases represent buyers moving forward on their plans, meaning future demand will soften at some point.”
Fannie Mae’s report was favorable regarding new home sales, forecasting robust activity as homebuilders work to complete more homes after ongoing supply chain and labor-related delays.
Multifamily starts are slated to total 465,000 units in 2022—up from a previous 442,000—while single-family housing starts are slated to average 1.15 million units compared to an earlier 1.17 million, according to the report.
Despite the optimism, building sector pundits have been skeptical that conditions will get better for builders who are still battling longer build times and higher prices for new homes.
“I would not expect a significant easing of constraints, and in part that does reflect the experience of the individual participant of the market,” said Sam Chandan, a professor of finance and director of Stern Real Estate at New York University in a recent interview with RISMedia.
“I expect for the foreseeable future the market will feel slight constraint and that will mean higher costs across the board, as well as for homebuyers, and ultimately act as a drag on the supply of new houses,” Chandon added.
Jordan Grice is RISMedia’s associate online editor. Email him with your real estate news ideas, jgrice@rismedia.com.
Real Estate Challenges: Spot on! That is exactly what we are seeing on the “Front lines.” Buyer’s, ” lock your rates as soon as you are able to do this.”
I Just lost two prior approvals on on a tight approval due to rate changes! But, don’t lose hope. We are still on the hunt! The numbers just moved downward a tad and hope Seller’s meet us there.