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Fannie Mae’s Rosy Housing Market Forecast Only Means the Crash Will Be More Devastating

Last Updated September 23, 2020 1:28 PM
Sam Bourgi
Last Updated September 23, 2020 1:28 PM
  • Fannie Mae’s monthly sentiment indicator approached record highs in December.
  • The government-sponsored enterprise released a forecast last year calling for mortgage rates to plunge to five-decade lows in 2020.
  • Mortgage rates continue to be the primary driver of the so-called housing recovery – a dangerous ingredient for an economy struggling with record debt and stagnant real wages.

Fannie Mae painted a rosy picture of the U.S. housing market in its latest sentiment report, arguing that a stronger economy and lower mortgage rates were boosting consumer confidence.

At the surface, Fannie has good reason to be upbeat about the housing market. After all, the quasi-governmental agency is calling for mortgage rates to plunge to five-decade lows in 2020. Take away this important stimulus and the so-called housing recovery doesn’t have much to show for it – regardless of what attitudinal surveys say.

Fannie Mae Reports Positive Housing Trends

The December edition of Fannie’s Home Purchase Sentiment Index (HPSI)  improved 0.2 points to 91.7, putting it almost on part with the survey high set in August. Three of the six survey components registered monthly gains, including the percentage of Americans who believe real estate values will rise over the next 12 months.

Doug Duncan, Fannie’s senior vice president and chief economist, said:

The HPSI hit and remained near an all-time high in 2019, driven by the 16-percentage point year-over-year increase in the share of consumers believing it is a good time to buy. The HPSI’s strength supports our prediction of a healthy housing market in 2020, as well as consumers’ appetite and ability to absorb the expected increase in entry-level inventory.

Entry-level inventory is considered key for the sustainability of the housing recovery. Until now, many would-be buyers have been priced out of the market due to a lack of affordable options. First-time buyers with smaller down payments are at the low end of the totem pole.

Overall, the report indicates that Americans have a favorable view of mortgage rates over the next 12 months. If those expectations change, Fannie’s survey wouldn’t have the same positive spin.

Fannie Expects Mortgage Rates to Fall

If 2019 was the year that mortgage rates persistently declined due to Federal Reserve intervention in the economy, 2020 will be the year that rock-bottom interest rates become the norm.

A forecast released by Fannie  in December predicted that the 30-year fixed mortgage will average 3.6% for most of 2020 before plunging to 3.5% in the fourth quarter. If the forecast holds, it would mark the lowest annual average recorded  since 1973.

Freddie mac, mortgage rates
Mortgage rates have declined sharply since mid-2018. They’re headed even lower, according to Fannie. | Chart: Freddie Mac 

Data from Freddie Mac – another government-sponsored enterprise (GSE) – show that rates are well on their way to reaching that target. The average 30-year fixed-rate mortgage fell to 3.64% in the week ended Jan. 9.

Even Freddie acknowledged that,

The drop in mortgage rates, combined with the strong labor market, should propel a continued rise in homebuyer demand.

Housing Bubble Grows Bigger

Absent a real economic recovery – one that actually improves the quality of life for average citizens – artificially low interest rates only mask the troubling trends facing U.S. homebuyers.

For consumers straddled with record debt and stagnant wage growth, mortgage rates are the last lifeline for becoming a homeowner. And while average hourly earnings have improved under President Trump, they are only marginally higher than inflation (and probably far below ‘real’ inflation – something that isn’t tracked by official government figures).

The U.S. housing market first ran into trouble in 2014 when mortgage rates began to rise from their post-crisis lows. When the 30-year rate peaked near 5% in 2018, home sales declined sharply:

US existing home sales
U.S. existing home sales declined sharply in 2018 as rising mortgage rates pressured homebuyers. | Chart: tradingeconomics.com 

Consumers have become extremely sensitive to mortgage rates, so much so that even a one percentage point increase can mean the difference between buying a home or not. Case in point: Even when rates peaked back in 2014, they were still more than three percentage points below the historic average . The market didn’t care that mortgage rates were near historic lows, as evidenced by the steep drop in sales.

It’s clear by these numbers that homebuyers are overly reliant on cheap credit to finance their homes. If the cost of financing increases, even slightly, there’s strong reason to believe that demand will be impacted.

Housing isn’t the only segment of the U.S. economy in a bubble. Stocks and bonds also have bubble-like characteristics, with no less than the Federal Reserve propping up the market. The Federal Reserve’s low-rate stimulus is expected to remain on auto pilot this year, though a growing contingency of traders say further rate cuts are possibly by year’s end .

There’s a pretty good chance the U.S. economy will avoid recession this year, helping President Trump secure a second term. But the low-rate stimulus pushed by the Federal Reserve can only go so far. When it stops working due to inflation, deflation (a topic for another time) or massive debt accumulation, the housing market could be one of the first dominoes to fall.

Disclaimer: This article expresses the opinions of the author and does not necessarily reflect the views of CCN.com.