What the housing market's 'new normal' in 2022 means, according to Fannie Mae

Home prices to moderate as Fed raises interest rates

The housing market could be entering a new normal in the year ahead, Fannie Mae said. And the Fed's reaction to market changes will be critical. (iStock)

The housing market will enter a "new normal" in 2022 due to unprecedented coronavirus pandemic-induced changes to the housing market and subsequent policy responses, according to the latest Fannie Mae forecast. 

The mortgage giant forecasted that inflation will remain high and that home price growth will continue, adding that it's unclear what structural shifts in the economic and housing markets over the past two years will be permanent, according to its Economic and Strategic Research (ESR) Group's January 2022 commentary

The group says that home buyers could struggle with affordability challenges, and predicts home prices to jump 7.6% this year. Although that figure is higher than average, it's still down from the 17.3% home price appreciation that had been expected for 2021. This comes as high demand and home inventory shortages raise prices for home sales. And rising lumber prices and labor shortages also forced prices higher

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Fed likely to raise rates several times, Fannie Mae projects

The ESR Group explained amid continued inflation, the Federal Reserve’s policy response will be critical in 2022 and 2023. The group projects inflation will average 7% annually in the first quarter before slowing to a still-elevated 4% by year's-end. Fannie Mae projects the Fed will raise rates a total of three times in 2022 to combat this inflation.

"We expect economic growth to continue slowing as the impacts of fiscal stimulus fade and the country's attention increasingly turns to rising inflation," Doug Duncan, Fannie Mae senior vice president and chief economist, said. "The Fed has accelerated the pace at which it intends to reduce monetary accommodation, as inflation appears more resilient than initially expected. 

"Currently, we expect inflation to run above the Fed's 2% target through 2023, and for the Fed to respond by tightening over that period," Duncan said. "The resultant rise in interest rates will likely put additional stress on housing affordability measures vis-à-vis higher mortgage rates for consumers and the continued, though decelerating, rise in home prices."

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Consumers could see smaller savings in year ahead

Fannie Mae projects economic growth to continue in 2022, but says individuals’ savings accounts could begin to dwindle amid higher-priced purchases. It forecasts real gross domestic product (GDP) to reach 5.5% for 2021 – marking the strongest annual growth rate since 1984 – before falling to 3.1% in 2022.

"While consumers still have a significantly elevated level of savings, the rate of saving has fallen such that, over time, we believe 'excess' saving will likely be eroded and affordability increasingly constrained," Duncan said. "We observe an early indication of this in recent increases in debt-to-income measures associated with incoming mortgage originations."

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