Hot inflation, economic data cloud outlook for rate cuts
Recent strong economic data and persistent inflation have shifted market expectations, leading to higher interest rates and reduced likelihood of Federal Reserve rate cuts this year.
Despite these rising rates posing challenges to homebuyer affordability and the recovery of home sales, the housing market is showing signs of resilience.
Fannie Mae’s Economic and Strategic Research (ESR) group noted that new listings of homes available for sale have continued to rise. The number of homes available on the market rose 4.7% to 1.11 million, according to the National Association of REALTORS (NAR).
Although forecasting a modest increase in existing home sales over the year, the group expects the flow of new listings to outpace home sales, gradually thawing housing inventory and contributing to decelerating home price growth.
However, based on incoming strong home price data, the ESR Group now expects home prices to rise 4.8% in 2024, up 1.6 percentage points from last quarter's projection, and then another 1.5% in 2025.
"Financial markets rapidly repriced their interest rate expectations following hotter-than-expected inflation reports and ongoing strong payroll employment gains," Hamilton Fout, vice president of economic and strategic research at Fannie Mae, said in the report.
"While we still expect economic growth and inflation to moderate going forward – and, thus, for mortgage rates to drift downward – interest rates existing in a 'higher for longer' state seems to be an increasingly real possibility in the eyes of market participants, as well as some homebuyers and sellers."
While interest rate cuts appear to be on hold due to the recent mix of strong economic data and hot inflation reports, the ESR Group continues to forecast slowing employment and economic growth, as well as progress toward 2% inflation over its forecast horizon.
However, recent data have caused a reassessment of the pace of decelerating inflation, and the group now expects the Consumer Price Index (CPI) to end 2024 at a 3.1% annual rate, compared to the 2.5% previously projected.
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Fout acknowledged the challenges posed by higher rates, stating, "While we've recently seen evidence that some potential home sellers are becoming more acclimated to the higher mortgage rate environment and putting their homes on the market, the recent move upward in rates is yet another headwind to the recovery of home sales, and it intensifies longstanding affordability challenges for consumers."
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