Fannie Mae’s October forecast is its most pessimistic one to date for 2022. 

In a statement, Chief Economist Doug Duncan said they now expect housing prices to drop by 1.5% in 2023. They’re also projecting a 21% decline in home sales. 

As Federal Reserve policymakers struggle to get inflation under control—with three consecutive rate hikes—and mortgage rates hovering around 7%, housing affordability is taking hits from all sides. 

Now, with Fannie Mae making downward revisions to their projections for the 2023 housing market, a modest recession at the beginning of the year is looking more likely than ever. 

Here’s what you need to know. 

Declines in median home prices and sales

As head of Fannie Mae’s Economic and Strategic Research (ESR) Group, Doug Duncan spelled out the biggest takeaways from their newest report. 

Looking ahead to the full year 2023, on a national basis, we expect an average home price decline of 1.5 percent. Given the ongoing tension between potential homebuyers and home-sellers at the moment, we believe the pace of sales is likely to slow even further, too.

Doug Duncan

Fannie Mae SVP and Chief Economist

As the fourth quarter of 2022 approaches, Fannie Mae’s latest housing market forecast reflects the impact of high inflation, Fed rate hikes, and the nationwide cooling in buyer demand. 

Home prices have already softened in some areas of the country, but recent numbers still show annual increases in home price appreciation. If Fannie Mae’s forecast is accurate, that will likely change as soon as the second quarter of 2023.  

Canva-graphic-Fannie-Mae-home-price-appreciation-October-forecast

Declines expected in both home sales and median home prices

After the midsummer pull-back, mortgage rates are back up, hovering around 7% for the 30-year fixed rate, causing a significant drop in demand for purchase mortgages (not to mention refi applications). 

Given that, Fannie Mae has downgraded their expectations for home price growth for the near term:

  • 2022: 9.0% — down from 16.0%
  • 2023: -1.5% — down from 4.4%

Economists expect home price growth to turn negative starting in Q2 of 2023, due mainly to higher mortgage rates. 

The ESR group has also lowered its expectations for total single-family home sales: 

  • 2022: 5.64 million — down 18.1% from the previous year
  • 2023: 4.47 million — down 20.8% 

Rising mortgage rates boost the “lock in” effect

As mortgage rates continue their upward climb, Fannie Mae expects the “lock in” effect to limit the number of move-up buyers—not to mention applications for refinancing mortgages. 

Existing mortgage borrowers with rates well below current levels have little incentive to upgrade their living spaces when they calculate the increase in their monthly mortgage payments, based on today’s rates.

The continued increase in total inventories of homes for sale is largely due to the nationwide slowdown in home sales. New listings in September were down 9.8% year over year. 

Diminished housing affordability, combined with the “lock in” effect, will likely continue to slow the pace of sales for existing homes. 

New home sales and homebuilder sentiment

On the other hand, new home sales increased by 28.8% in August, according to the Census Bureau, reaching an annualized pace of 685,000—its highest since March. 

Since that jump in sales coincided with the temporary summer pullback in mortgage rates, Fannie Mae economists see it as (most likely) a brief deviation from an otherwise consistent downward trend in home sales. 

That said, they’re seeing evidence of an increased willingness in homebuilders to more heavily discount prices on new construction to drive up sales volumes. 

The inventory of completed homes for sale increased 11.4% in August to its highest level in two years, ramping up the incentive to give buyers a break on home prices. Easing cost pressures in building materials have also helped, along with a projected loosening in the labor market. 

Given that, Fannie Mae expects sales of new single-family homes to outperform existing home sales in the near term. 

Decline in volumes for mortgage applications

Fannie Mae’s October report downgraded its 2022 purchase mortgage origination volumes by $78 billion from the previous month’s forecast to $1.6 trillion. 

The revised forecast is based on incoming mortgage application data as well as their recently downgraded expectations for home sales and home price growth. 

In the coming year, Fannie Mae’s economists expect mortgage purchase volumes to drop 18% year over year to $1.3 trillion—$338 billion below last month’s forecast—again based on less optimistic home price and sales forecasts. 

Their forecast for the refinance market reflects the same outlook:

  • 2022 volumes: $701 billion—$30 billion lower than September’s forecast
  • 2023 volumes: $392 billion—$98 billion lower than September’s forecast

October forecasts for both years are based on declining refinance applications, due primarily to higher mortgage rates. 

Top takeaways for real estate agents

Get comfortable with Fannie Mae’s latest forecasts and statements detailing the impact of any changes in the market. Use the data and insights to help your clients and community better understand the current market. 

The more clearly you can articulate these forecasts and what they mean for your clients, the more they’ll rely on you to clear the fog and keep them informed. And the more they’ll trust you to guide them when they’re ready to buy or sell a home.