Fannie Mae’s Pipe Dream Can’t Prevent a U.S. Housing Market Meltdown

Posted in: Housing MarketOp-ed
December 25, 2019 12:00 PM UTC

Fannie Mae has issued a solid U.S. housing market forecast for next year, but that might not save the bubble from popping.

  • Fannie Mae is upbeat about the U.S. housing market in 2020.
  • But the forecast remains disconnected from the reality on the ground.
  • A host of factors can wreck the momentum next year.

The Federal National Mortgage Association, popularly known as Fannie Mae, is upbeat about the U.S. housing market’s prospects in 2020. It recently issued a sunny forecast for next year, estimating that single-family housing starts will jump 10% after this year’s meager annual growth of just 1%.

Fannie Mae also predicts that single-family housing starts will hit a post-recession high of 1 million in 2021. But I believe that Fannie Mae’s upbeat forecast is a pipe-dream as the ground reality in the U.S. housing market suggests otherwise.

Buyers are being priced out of the U.S. housing market

There have been several signs of a crack in the U.S. housing market of late. Housing starts have been growing at a patchy pace, while sales of both new and existing homes have been swaying between positive and negative territory.

The weakness in the U.S. housing market reared its ugly head once again last month as sales of existing homes fell 1.7% in November, clocking a seasonally-adjusted annual rate of 5.35 million units. This missed economists’ expectations of a smaller decline of just 0.2% to 5.44 million units. What’s more, October’s number was also revised downward to a pace of 5.44 million units.

The drop in existing home sales might seem a tad surprising at first considering that mortgage rates are still very close to historic lows.

So, why is the U.S. housing market not able to string together consistent gains? The answer is pretty simple – consumers are being priced out of the market as values surge.

The median price of existing homes was up 5.4% annually during November. This was the 93rd month of consecutive annual home price gains. This price increase can be attributed to a lack of housing supply. The National Association of Realtors reports that the supply of homes on the market slipped 5.7% annually in November.

What’s more, there are just 3.7 months of inventory on the market right now. This is far below the ideal supply level of six to seven months. The bad news for the U.S. housing market is that housing permits have actually declined so far this year.

U.S. housing market permits have declined this year. | Source: St. Louis Fed

This demand-supply gap is likely to persist next year, keeping potential buyers on the sidelines and knocking the wind out of the market.

Why buyers will pull back

The biggest reason why buyers might be unwilling to commit to buying a house next year is because of weak wage growth. Not surprisingly, mortgage applications for the week ending Dec. 13 were down 5% over the preceding week, according to the Mortgage Bankers Association.

This dip in mortgage applications while rates are so low is a negative sign for the housing market. Looking ahead, the problem could become more severe as consumer confidence continues to wane.

There’s a good chance that consumer confidence could tumble further in 2020 on the back of planned workforce reductions. According to CNBC’s Global CFO Council survey for Q4 2019, 60% of the CFOs in the U.S. expect to lower their companies’ headcount.

A survey shows that a majority of company CFOs believe workforce reductions are on the way next year. | Source: CNBC

All of this presents a challenge for the U.S. housing market that’s already struggling on the back of weak supply, rising prices, and weakening affordability. Of course, banks are planning to loosen lending rules next year to prop up home sales, but history tells us that doing so could eventually lead us to the next U.S. housing market crash. So, don’t be surprised to see Fannie Mae’s 2020 forecast fall flat on its face.

This article was edited by Sam Bourgi.

Last modified: January 22, 2020 11:40 PM UTC

Harsh Chauhan @techjunk13

Harsh has been covering financial markets on CCN since 2019. He has also written for other reputed publications such as The Motley Fool, TheStreet, and Seeking Alpha, and gets regularly featured on Yahoo! Finance. Harsh is based out of Indore, India. You can follow him on Twitter @techjunk13 or email him at harsh.chauhan(at)outlook.com.

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