According to Fannie Mae economists, the U.S. housing market is defying expectations of a crash this year. Limited inventory and high demand are keeping prices high, leading to a slower decline in home prices than previously anticipated. Fannie Mae estimates that home prices will only decline by 1.2% in 2023 and 2.2% the following year, which is an improvement from their earlier predictions of a 4.2% decline this year and a 2.3% decline in 2023.
The lack of existing homes available for sale is a key factor driving the current housing market dynamics. This trend persisted during the spring homebuying season, when more homes are typically put on the market. As a result, home price growth has returned in recent months and new home construction continues to be boosted.
The Federal Reserve's 15-month-long interest-rate hike campaign has sent mortgage rates soaring. However, home prices have hardly budged due to the lack of available homes for sale. Sellers who locked in a low mortgage rate before the pandemic are reluctant to sell, leaving few options for eager buyers. The number of available homes on the market in June was down more than 47% compared to pre-pandemic levels in early 2020.
Fannie Mae's chief economist, Doug Duncan, attributes the stronger-than-expected housing price growth to the demographic-related demand from aging Baby Boomers and Gen-Xers taking advantage of historically low mortgage rates. With limited availability, more buyers are turning to new houses instead of existing ones. However, years of meager homebuilding over the past business cycle mean that the housing supply imbalance is likely to continue for some time.
While the Federal Reserve's aggressive interest-rate hike campaign has cooled the interest-rate-sensitive housing market, the return to lower mortgage rates has not been smooth. Rates on the popular 30-year fixed mortgage are currently around 6.71%, well above the 5.7% rate recorded one year ago and the pre-pandemic average of 3.9%.
Overall, the U.S. housing market is experiencing limited inventory, high demand, and slower price declines than previously anticipated. The lack of available homes for sale and the impact of the Federal Reserve's interest-rate hike campaign are key factors shaping the current state of the market.