Inflation Risk Takes Center Stage as Strong Economic Growth Expected to Moderate

WASHINGTON, DC – Economic growth expectations for full-year 2021 were revised modestly upward to 7.1 percent, one-tenth higher than the previous forecast, due to stronger-than-expected consumer spending data year to date, according to the June 2021 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group. The ESR Group also continues to forecast a deceleration in the recently rapid growth trajectory, projecting economic growth to slow to 5.5 percent in the fourth quarter of 2021 and 2.2 percent in the fourth quarter of 2022. However, as discussed in the ESR Group’s latest Housing Insights piece, housing appears poised to become a meaningful driver of inflation over the next year and a half, contributing to the ESR Group’s prediction that domestic inflation measures will remain near 5 percent through year-end 2021 – before decelerating to approximately 3 percent by the end of 2022 – well above the Federal Reserve’s 2.0-percent inflation target. At the moment, the ESR Group’s large upward revision to its inflation expectations has not materially changed its growth forecast, because while it sees underlying inflation pressure building, it believes the factors driving current inflation to be largely transitory. Even so, the downside risks associated with potentially persistently higher inflation, including a more aggressive pace of monetary tightening by the Federal Reserve, could drag on growth over the forecast horizon.

While demand for housing remains quite strong, the ESR Group’s latest forecast reiterates that supply-side factors continue to significantly limit construction, mortgage origination, and home sale activity. In fact, the ESR Group meaningfully downgraded its forecast for second and third quarter home sales – to 6.6 million and 6.5 million, respectively, from 6.9 million and 6.7 million in the prior forecast – due to the ongoing lack of available listings and a softening pace of new construction due to supply constraints. The ESR Group’s 30-year fixed mortgage rate forecast was little changed at 3.0 percent and 3.3 percent on a full-year 2021 and 2022 basis, respectively.

“Strong demand for housing continues to run up against a long-running lack of supply,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “We’ve seen this disconnect lead to rapid house prices gains over this past year, but we believe it will soon reveal itself within inflation measures as well. Demographic factors remain favorable for a strong housing market and many of the supply constraints that homebuilders face are likely to  persist in the near term, so this upward pricing pressure is not likely to be as transitory as many of the current inflation drivers.”

Duncan continued: “Nonetheless, in the past housing has served as an intermediate-term inflation hedge. If interest rates rise to reflect the increase in inflation based on an expectation of tighter future monetary policy, home sales would likely moderate along with house price appreciation.”

Visit the Economic & Strategic Research site at fanniemae.com to read the full June 2021 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae’s Economic & Strategic Research Group, please click here.