Fannie Mae Increases 2021 Economic Growth Forecast
Fannie Mae‘s latest forecast projects economic growth to hit 5.3% in 2021, an increase of 0.8 percentage points from what the government-sponsored enterprise projected last month.
The forecasted growth is significantly more than the revised numbers for 2020, which Fannie Mae projects will end up as a 2.7% contraction. The company said the economy will see an especially strong uptick in the spring months, with the expansion of COVID-19 vaccination efforts and the warmer weather.
“COVID-19 remains the dominant force altering the path of the economy through the behaviors of people, businesses and policy makers,” said Doug Duncan, Fannie Mae senior vice president and chief economist. “Therefore, the best policy for economic recovery is the broad distribution of an effective vaccine, which is underway. The sooner this can be successfully accomplished the sooner growth can accelerate, and our thought is that by mid-year vaccine distribution efforts will be well-established, allowing for a strong second half.”
But even as overall economic growth accelerates, Fannie Mae said housing growth could slow over the next year. The company’s Economic and Strategic Research Group expects home sales to rise by 3.8% in 2021, with the monthly pace slowing throughout the year. Purchase mortgage originations are expected to rise to $1.8 trillion in 2021, up from the projected $1.6 trillion in 2020, while refinance originations could reach $2.2 trillion in 2021, down from a projected all-time high of $2.8 trillion in 2020.
“Our latest forecast projects that the continued waning of pent-up demand from last year’s delayed spring homebuying season, coupled with a modest rise in interest rates, will likely slow the pace of housing, measured both by the volume of mortgages refinanced and by the pace of home sales,” Duncan said.
“However, in our view, a modest slowdown in the sales pace is unlikely to prevent year-end 2021 home sales from being higher than 2020.”
With mortgage rates near historic lows, the ESR Group estimates that 67% of outstanding mortgages have at least a half-percentage point incentive to refinance.
“One impact of our projected growth acceleration is likely to be modestly rising interest rates, whether as a result of increased growth expectations – as consumer savings are augmented by stimulus leading to stronger consumer spending – or by a modest increase in inflation driven by demand growth outpacing a recovery in supply,” Duncan said. “We believe the Fed’s policy of tolerating a modest overshoot of its long-term inflation target is likely to be tested.”
Freddie Mac is also forecasting a modest rise in interest rates bringing a slowdown in originations, however its total originations prediction comes in lower than Fannie Mae. Freddie Mac forecasted the 30-year fixed-rate mortgage to be 2.9% in 2021 and 3.2% in 2022.
“Entering 2021, we anticipate a modest rise in rates that will likely affect refinance originations, which are coming off a remarkable year. We therefore forecast total originations to decline slightly to $3.3 trillion but remain strong this year,” said Freddie Mac Chief Economist Sam Khater.
Freddie Mac’s purchase origination forecast is down just slightly from Fannie Mae’s at $1.6 trillion for 2021, but it also projected $1.8 trillion in refinance originations in 2021, down considerably from its fellow GSE’s forecast.
Freddie Mac said it expects home price growth to be 5.4% in 2021 and decrease to 3% in 2022. It said home sales will reach 6.5 million in 2021 and decrease to 6.2 million in 2022.
But despite these projected slowdowns, other economists are still forecasting a strong year ahead for the housing market. Some even say the housing market presents a bright spot for unemployment numbers, which are currently inflated due to the effects of the pandemic.