Economic Developments - January 2024

Mortgage Rates Expected to Moderate Toward a More Normal Level

We anticipate that after the past several years of extreme volatility in interest rates, the 30-year fixed rate mortgage rate will continue to moderate over the course of 2024, moving toward a rate below 6 percent by year end. The December Federal Reserve meeting was widely interpreted by financial markets as being a “pivot” toward a more neutral monetary policy stance, and, as such, futures markets, as of this writing, are pricing in between 125-150 basis points of fed funds rate cuts by 2024-year end, and the 10-year Treasury yield has fallen roughly 100 basis points from its peak in October. The 30-year mortgage rate has followed, sitting at 6.66 percent in the most recent Freddie Mac survey, down from a peak of 7.79 percent in October 2023. While we think financial markets may have gotten ahead of themselves regarding the extent of Federal Reserve rate cuts this year (we currently forecast 100 basis points of cuts in 2024), the outlook for both short-term rates and mortgage rates is now decidedly lower than what we had previously forecast.

Existing Home Sales Market Will Begin to Unfreeze

While we expect affordability will remain stretched and the supply of homes for sale tight, an easing in mortgage rates is expected to begin thawing the existing home sales market, which was held back in 2023 by strong lock-in effects. Furthermore, many homebuyers and sellers in 2020 and 2021 likely pulled forward their moving intentions to take advantage of low mortgage rates and remote working options following the COVID-19 pandemic, reducing the pool of homeowners wishing to move soon thereafter. As time progresses, however, we believe this effect will wane, and when combined with existing homeowners who delayed their moves in 2023 due to high mortgage rates, we expect that a growing number of home sales will occur. While we are still anticipating a comparatively sluggish pace of existing home sales, as affordability and a lack of supply remain challenges to the market, we are forecasting successive quarterly sales increases in 2024 with sales ending the year around 4.5 million annualized units in Q4 compared to the year low of around 3.8 million annualized units in Q4 2023. For the year, we forecast existing sales to rise 3.1 percent in 2024.

Single-Family Home Construction to Remain Strong, but Multifamily Continues its Breather

The strength of single-family home construction surprised to the upside over much of 2023. While the loosening of the existing sales market should help balance homebuyer interest in new and existing homes, the overall housing stock remains limited relative to what historical demographic trends would suggest is required following a decade of underbuilding following the financial crisis. Millennials also still have a few more years of being at the peak first-time homebuying age. Recent data on residential housing construction employment also points to an expanding homebuilding industry. As such, we expect new construction to remain strong, and we project 2024 single-family housing starts to be 5.7 percent higher than in 2023.

In contrast, the slowdown in multifamily construction that began in 2023 will likely continue into 2024. Rent growth has been weak as an historically high flow of new supply enters the market. While we expect solid multifamily construction over the next five years given the ongoing overall lack of housing supply, 2024 is likely to continue to be a breather following a torrid pace of starts in 2022. For the year, we forecast multifamily housing starts to fall 18.3 percent in 2024

Home Price Growth to Moderate

As measured by the Fannie Mae Home Price Index, home prices ended 2023 up 7.1 percent on a Q4/Q4 basis, a strong pace of growth, especially given the surge in mortgage rates over the year and worsening affordability conditions. While moderating mortgage rates going forward will help support home prices, affordability is still going to remain historically challenging. Combined with a cooling labor market, we see the ability of homebuyers to keep pushing prices upward as more limited. The aforementioned unfreezing of the existing home sales market, combined with increasing supply of new homes coming online, should help loosen the market somewhat. We believe slowing or even declining multifamily rents in much of the country will also make the rent vs. buy calculus shift comparatively more favorable to renting multifamily units, reducing upward pressure on single-family home prices.

Mortgage Originations Will Grow Meaningfully, Including Some Signs of Life in Refinance Loans

With an expectation of rising home sales, moderating mortgage rates, a downward drift in the cash share of home sales, and continued positive home price growth, we forecast single-family mortgage origination dollar volume to grow significantly in 2024, albeit from a depressed starting level. We expect 2024 single-family purchase origination volumes will be $1.5 trillion, a 19 percent increase from $1.3 trillion in 2023.

We still expect single-family refinance mortgage originations to remain subdued, as even with the 30-year fixed mortgage rate expected to trend to a little below 6 percent, that rate is above the majority of currently outstanding mortgage loans. We estimate that roughly 90 percent of outstanding Fannie Mae single-family conventional 30-year fixed rate mortgage loans currently have a note rate below 6 percent. So, while many recent borrowers from 2023 will begin to face meaningful benefits by refinancing, a strong refinance wave driven by rate-term borrowers is not expected in 2024. Even as rates moderate, we expect continued interest in cash-out refinancing relative to past periods, especially given heightened levels of aggregate homeowner equity available following the home price gains of the last few years. We project 2024 single-family refinance volumes for the overall U.S. market will be $490 billion up from only $246 billion in 2023. Despite this being a near doubling of volumes, it is at a level still 33 percent below 2022 refinance originations.

The Economic Backdrop is Looking More Positive, Though Still with Elevated Recession Risk

We have removed our explicit call for a recession in 2024 and replaced it with an expectation of below-trend growth. We have upgraded our 2024 economic outlook from a 0.3 percent Q4/Q4 contraction of real gross domestic product (GDP) to a modest expansion of 1.1 percent.

In our December commentary, we argued that the restrictive stance of monetary policy would need to ease if a downturn were to be prevented. This has occurred following the previously discussed Fed “pivot” in December. The Chicago Fed National Financial Conditions Index currently shows the loosest financial conditions in nearly 11 months, while the loosening of the Goldman Sachs Financial Conditions Index over November and December was the greatest two months of easing in the 40-year-plus history of the index. While monetary policy remains in a restrictive stance in an absolute sense and will still weigh on economic activity, when compared to October, broader financial conditions have eased considerably. Combined with continued solid real income gains in recent months, we have decided to upgrade our growth outlook.

Still, we believe the economy remains at a higher-than-normal risk for a recession in 2024. Monetary policy works with long lags, so the higher rates over the past year are still likely to weigh on business and consumer activity into 2024. Furthermore, with an expectation of slow economic growth, there will be little momentum in the economy to absorb any unforeseen economic shocks that could emerge. It should be noted that there are mixed labor market signals currently in the data. The headline payrolls number showed a solid 216,000 jobs added to the economy in December, but the corresponding household employment survey showed a decline of 683,000 jobs. While some of this spread is due to definitional differences, controlling for this still illustrates a divergence. Also of note is the ISM Services Index showing a large decline in its employment measure over the month.

Additionally, the easing of monetary policy opens the door for inflation to possibly reanimate. Despite signs of softening in the labor market, the unemployment rate remains low and average hourly earnings over the past two months have come in hot, highlighting the possibility that a tight labor market could still contribute to inflationary pressures in the future. Further, the recent rise in shipping rates due to attacks on container vessels in the Red Sea risks a reinflation in goods prices. Our baseline forecast continues to show inflation trending toward the Fed’s 2-percent target over the course of the year, but risks to the outlook remain.

Economic & Strategic Research (ESR) Group
January 12, 2024
For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR's Economic and Housing Weekly Notes.

Data sources for charts: Bureau of Economic Analysis, Bureau of Labor Statistics, Census Bureau, National Association of REALTORS, Freddie Mac, Fannie Mae, Federal Reserve

Opinions, analyses, estimates, forecasts and other views of Fannie Mae's Economic & Strategic Research (ESR) Group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.