New analysis from Fannie Mae’s Economic and Strategic Research (ESR) Group suggests that home sales in 2021 will increase 6.3 percent as the industry continues to grapple with strong demand and limited supply.
While a lack of existing homes for sale is heightening the demand for new homes, supply constraints – most notably lumber – and a dearth of buildable lots, as well as hiring difficulties, are limiting homebuilders’ pace of single-family construction, which is still forecast to be 24.8 percent higher in 2021 than 2020.
The ESR Group’s mortgage origination forecast remains largely unchanged, at $4.1 trillion in 2021, but the recently lower mortgage rate environment contributed to a slight shift in its composition, with the expected refinance share ticking up a couple percentage points, to 55 percent.
“Stronger inflation and a resultant move in interest rates are risks that we believe should be monitored,” says Doug Duncan, Fannie Mae’s senior vice president and chief economist. “As the effects of expansionary monetary policy continue to work their way through the economy, inflationary expectations may continue to rise. This could lead to prices rising further, even with growth concurrently slowing in the presence of diminished labor market slack and waning fiscal policy support.
“If such a scenario were to play out, the question then becomes whether this necessitates a response by the Federal Reserve,” he continues. “While momentum in the housing market will likely continue in the near term, this is an increasingly important consideration for 2022.”
Additional strength in consumer spending was previously projected to occur later in 2021 or early 2022, but recent incoming data increasingly points to eagerness on the part of consumers amid continued progress mobilizing COVID-19 vaccinations and waning virus-related restrictions.
With stronger growth expected in the current year, the ESR Group slightly downgraded its expectations for 2022 real GDP growth by 0.2 percentage points, to 2.8 percent. Despite expectations that the economy will continue to grow over the forecast horizon, downside risks to the forecast are increasing and include supply chain disruptions, labor scarcity and rising inflationary pressure.