Forecasting is Difficult, Especially the Future: — Housing Sales, Interest Rates, Home Prices and Lending 2020-2021

Forecasting is difficult, especially the future, is a small bit of economist humor that embodies more truth than may be appreciated.   While ongoing trends are easy to forecast by just continuing the line or general direction of sales-interest rates-prices-jobs or any other economic factor, the difficulty arises in anticipating or predicting the events(s) that alter the ongoing trends.  An unseen event example was September 11, 2001 which immediately plunged the U.S. economy into a recession.

Fortunately for those involved in residential real estate, each month Fannie Mae, Freddie Mac and the MBA update their forecasts for residential home sales, prices, interest rates and lending volumes.

The latest 30-year fixed-rate conventional mortgage interest rate expectations are shown in the following table.   Stable is an appropriate word to describe the outlook.  Ignored in this round of forecasts in the potential (one of those prementioned difficult to forecast events) for the Federal Reserve to up their inflation trigger to alter monetary policy from the current 2.0 percent to 2.5 percent.  Such an action would likely see residential rates increase by a corresponding amount in 2020 by year end.   If no change for the inflation target trigger is made by the Fed, expectations are for no rate changes in 2020 and 2021 as shown.  While the MBA current forecast calls for a 4.0 percent average in 2022, neither Fannie Mae nor Freddie Mac currently forecast beyond 2021.

The following table shows expected residential refinance lending volumes in 2020 and 2021.  The first and second quarters of 2020 are forecast to be up (when compared to the same periods in 2019), while Q3 and Q4 are expected to be down 61.5 percent and 19.9 percent, respectively,  when compared to a year ago.   The forecast decline is a function of the expectation of current higher-rate loans in place having already been refinanced prior to mid-year 2020 and not due to rising interest rates.

Purchase lending is detailed in the next table and is expected to rise just 1.9 percent in 2020, growing to 3.6 percent in 2021.

Total residential lending from combined purchase and refinance activity is shown in the next table.  Despite rising purchase lending volumes, refinance contraction sees total residential lending shrinking 5.4 percent in 2020 and another 8.6 percent in 2021.

Existing, new and total home sales forecasts are shown in the next table.  Freddie Mac forecasts only total housing sales without differentiating between new and existing purchase transactions.  Existing home sales are expected to rise 1.5 percent in 2020 and 1.9 percent in 2021 as indicated by averaging Fannie Mae’s and the MSA’s forecasts, with new home sales up 1.4 percent in 2020 and up a miniscule 0.8 percent in 2021.

The last table shows current expectations for median home price changes.  As with existing home sales, Freddie Mac does not report price change expectations for new or existing home values.  Existing home values are expected to rachet up 3.5 percent in 2020 and up another 2.0 percent in 2021.  New home prices, after dipping 1.9 percent in 2020 (due to increased sales of first-time homebuyer properties) are expected to increase 4.0 percent in 2020 and another 2.0 percent in 2021.

The increase in 2019 refinance lending was not expected one-year ago as interest rates were anticipated to rise.   Stability is seen in 2020 and 2021 interest rates which a good outlook today.

One event, however, can change all of this as history has shown.   The trends are easy forecast, it’s those darn events that are elusive.


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