Fannie Mae Downgrades 2021 GDP, Home Sales Forecast

Fannie Mae has downgraded its 2021 real gross domestic product forecast citing the Delta variant of COVID-19 and persistently strained supply chains but has upgraded its outlook for 2022. 

The GSE dropped its 2021 fourth quarter year over year projection to 6.3% from 7% while raising its expectations for a 2022 growth rate to 3.2% from 2.8%. Because of lower-than-expected outlooks for interest rates, the forecast for home loan originations in 2021 rose to $4.4 trillion from $4.2 trillion with the bulk of the increase from refinancing. Its forecast of 2022 originations ticked upward to $3.3 trillion from a prior $3.2 trillion.

Future growth for GDP, asserted the mortgage lender, is heavily dependent on a combination of businesses rebuilding depleted inventories and consumer spending continuing to shift away from goods and into services.

“While we expect solid GDP growth in the coming quarters as these trends materialize, behavioral changes related to the Delta variant of COVID-19 and persistently strained supply chains will likely weigh more heavily on the speed of recovery than we had previously forecast,” according to Fannie Mae’s analysis.

The authors said they are worried stronger inflation is possible with pressures building.

“If this occurs, the Fed may tighten monetary policy earlier and/or more aggressively than currently anticipated. This would likely drag on growth, housing, and mortgage activity,” Fannie cautioned.

Other downside risks for housing mentioned in the report include the permanence of shifts in recent regional migration patterns, the impact on home sales and prices from the expiration of mortgage forbearance programs, and the duration of housing construction supply chain problems.

Upside risks noted include stronger than anticipated productivity growth, leading to less inflation and greater real wage growth, and elevated household savings driving more robust consumption than forecast.

For the second half of this year, Fannie Mae dropped its home sales forecast due to continued supply constraints impacting homebuilders. It now predicts that for 2021 home sales will rise over 2020 to 3.1% from the 3.8% it said it expected in July. The decline in home sales expectations was accompanied by a drop in an increase of new construction to 16.9% from 17.7% previously.

The lender said demand for home homes is likely softening a bit as last year’s purchases wanes and rising home prices increasingly weigh on affordability.

New sale listings have increased somewhat in recent months to approximately the same pace as in 2019, Fannie pointed out, but it pointed out this rate is still too low to sustain the current sales pace, which is currently about 10% higher than the mid-2019 sales rate.

In June new home sales fell 6.6% to 676,000, a drop larger than the analysts had anticipated.

They attributed the weak sales, the lowest since April 2020, to be primarily driven by homebuilders turning down orders to give themselves time to catch up on construction backlogs.