The U.S. housing market is defying earlier predictions of significant national home price declines, as highlighted by Fannie Mae in their latest housing forecast. According to their revised outlook, Fannie Mae anticipates a decrease of 1.2% in national home prices, as measured by the Fannie Mae Home Price Index in 2023, followed by an additional 2.2% decline in 2024. This comes as a revision from their previous forecast in February, which projected a 4.2% fall in 2023 and a subsequent 2.3% dip in 2024.
So, why the upward revision? Doug Duncan, the chief economist at Fannie Mae, explains that the ongoing shortage of homes for sale is the critical factor. In a statement released last week, he emphasized that this scarcity continues to support home prices and single-family home construction activity.
Despite the mortgage rate shock experienced last year, with average 30-year fixed mortgage rates jumping from around 3% to close to 7%, national home prices have displayed remarkable resilience, surpassing earlier expectations. Duncan attributes this resilience to robust demand driven by demographic factors. The aging Baby Boomer generation choosing to stay in their homes and Gen-Xers capitalizing on historically low rates have contributed to keeping the housing supply at historically low levels. Duncan notes that although homebuilders are working to increase supply, years of limited homebuilding in the previous business cycle means the supply-demand imbalance will likely persist for some time.
While Fannie Mae does not foresee a crash in national home prices, their latest forecast does indicate a further slight decline. If their projection comes to fruition, home prices will be down 3.4% by December 2024 compared to December 2022. To achieve this, the U.S. housing market would need to experience a correction in the slower second half of the year, potentially erasing the gains made in the spring.
It's important to understand that when Fannie Mae refers to the "U.S. housing market" or "U.S. home prices," they refer to the national aggregate. It is possible that overheated markets in the Western regions could contribute to pushing national home prices lower while other parts of the country, such as the Midwest and Northeast, continue their upward trajectory.
Looking ahead, Fannie Mae's revised forecast model predicts the average 30-year fixed mortgage rate to decline to 6.3% by the end of 2023 gradually and further drop to 5.6% by the end of 2024.