Jump in Existing Home Sales Expected to Be Temporary with New Sales Comparatively Outperforming

Key Takeaways:

• The Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points to a target range of 4.75-5 percent at its March 21-22 meeting, the second consecutive 25-basis point hike. The FOMC’s press release states “some additional policy firming may be appropriate,” whereas it had previously stated that “ongoing rate increases” would be appropriate. The committee’s newest Summary of Economic Projections (SEP) was little changed from December as the median projection for the federal funds rate at the end of 2023 was unchanged at 5.1 percent and growth expectations were downgraded modestly.
• Durable goods orders fell 1.0 percent in February, according to the Census Bureau. Part of the decline was due to a 2.8 percent drop in transportation equipment stemming from fewer aircraft and motor vehicle and parts orders. Core capital goods orders (nondefense excluding aircraft) rose 0.2 percent and shipments of core capital goods, a proxy for business equipment investment, were flat after a 0.9 percent gain in January.
• Existing home sales jumped 14.5 percent to a seasonally adjusted annualized rate (SAAR) of 4.58 million in February, the highest level since September 2022, according to the National Association of REALTORS®. The inventory of existing homes for sale was flat at 980,000 and the months’ supply declined three-tenths to 2.6. The median sales price of existing homes declined 0.2 percent compared to a year ago, its first decline since 2012.
• New single-family home sales rose 1.1 percent to a SAAR of 640,000, though January’s figure was revised downward by nearly 40,000, according to the Census Bureau. New homes for sales dipped 0.7 percent to 436,000, though the number of those homes that are completed rose 5.9 percent to 72,000, approaching levels last seen in mid-2020. The months’ supply ticked down one-tenth to 8.2.

Forecast Impact:

The FOMC’s latest SEP shows only one more 25-basis point hike left before reaching the median projected terminal rate, though both the statement and Chair Powell’s press conference noted heightened uncertainty regarding the path of the economy, inflation, and monetary policy due to recent bank failures. It’s notable that recent banking turmoil will likely have cooling effects on aggregate demand that further rate hikes would have otherwise done, via tightening credit standards and weaker consumer and business sentiment. While the recent bank failures may prove to be a catalyst for the recession we have predicted since April of last year, it may also be the case that these events blow over relatively quickly and that inflation continues at an elevated pace. In this case the terminal fed funds rate would likely be higher than we currently project.

We had expected a boost to existing home sales in February following the pullback in mortgage rates around the turn of the year. Still, the jump was larger than we had expected, meaning we will likely upgrade our near-term forecast. However, based on more recent mortgage application activity, we expect a pullback in the March sales number, and over the medium term, we expect sales to be subdued. Affordability constraints and the lock-in effect, in which existing homeowners with low mortgage rates have a financial disincentive to move, will continue to weigh on demand. On the new home side, after revisions, the quarterly pace of sales is largely in line with our Q1 expectations. New home sales are expected to continue to show strength relative to existing home sales as homebuilders utilize mortgage rate buydowns and other concessions to move their elevated inventory of homes for sale, though new home sales will also continue to be affected by affordability issues and the lock-in effect.

Nathaniel Drake
Economic and Strategic Research Group
March 24, 2023

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic and 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.