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The surprising strength of the U.S. economy has quelled fears of a recession — but also means home prices are likely to keep rising and mortgage rates may not come down as quickly as previously expected, Fannie Mae economists said Thursday.

Last month, Fannie Mae economists were predicting this year might end up being the slowest year for home sales since 1995, as would-be homebuyers continued to grapple with affordability issues.

Recent declines in mortgage rates and the prospect that rates will fall below 6 percent next year have prompted forecasters at the mortgage giant to bump up their projections for 2024 and 2025 home sales — but only by a hair.

Home sales projected to grow 10% in 2025

Fannie Mae’s October housing forecast predicts 2024 home sales will total 4.77 million, up 30,000 units from September’s forecast of 4.74 million sales. If the latest forecast pans out, this year’s sales will surpass 2023 by 16,000 units — and last year will stay in the history books as the slowest year of the century.

“While potential homebuyers have noticed the decline in mortgage rates over the last few months, they are equally aware that there has been little relief on the home price side, the other primary driver of unaffordability, particularly for first-time buyers,” Fannie Mae Chief Economist Mark Palim said in a statement.

“The timing of the long-expected pick-up in home sales activity, as well as a further moderation in home price appreciation, will depend in part on the willingness of current homeowners to relinquish their low mortgage rates by offering their homes for sale.”

Fannie Mae forecasters envision a bigger sales bump next year, with home sales surging 10 percent to 5.24 million. That’s 27,000 more sales than Fannie Mae projected in September.

Most of next year’s sales growth is expected to come from existing homes, which Fannie Mae projects will climb 11 percent, to 4.52 million. While 2025 sales of new homes are expected to remain essentially flat at 715,000, that’s up from 703,000 in last month’s forecast.

“We have upwardly revised our new home sales outlook given the decline in interest rates in our forecast this month, and we continue to expect the dearth of existing homes being listed for sale to help support new home sales and lead to a gradual increase over the forecast horizon,” Fannie Mae forecasters said.

Home price appreciation decelerating

Fannie Mae’s October housing forecast projects that home prices will continue to appreciate next year, but at a slower pace. Although home price appreciation is expected to slow to 3.6 percent by the end of next year, that’s up from the 3 percent Q4 2025 appreciation forecast in July.

[Fannie Mae economists produce their housing forecast on a monthly basis, but home price appreciation projections are only updated on a quarterly basis.]

Elevated mortgage rates have left many homeowners feeling the “lock-in effect” — they don’t want to put their home on the market because they don’t want to give up the low rate on their existing mortgage. While home sales are projected to rebound next year, the lock-in effect has kept inventory in short supply in many markets — and helped prop up prices.

“We are expecting deceleration of home price growth as affordability continues to be stretched and inventories of homes available for sale are rising in some regions,” Fannie Mae economists said in commentary accompanying their latest forecast. “However, the overall low level of available homes for sale is still bolstering home price appreciation, especially as income growth and employment remain strong.”

Mortgage rates headed below 6%?

Fannie Mae forecasters predict rates on 30-year fixed-rate mortgages will drop below 6 percent in the first quarter of 2025 and continue falling to an average of 5.6 percent in Q3 and Q4.

But while that forecast was made public on Oct. 17, it was completed at the beginning of the month. Rates have been on the rise since then, which Fannie Mae forecasters say creates “upside risk” to their latest mortgage rate and home sales projections.

Since hitting a 2024 low of 6.03 percent on Sept. 17, mortgage rates have surged by 40 basis points, as strength in the economy is seen as allowing Fed policymakers to take a cautious approach to future rate cuts.

“On balance, the improved economic and labor market outlook are benefits to the housing market,” Fannie Mae forecasters said, although the recent rise in mortgage rates “is likely to keep home sales activity at subdued levels.”

While Fannie Mae’s forecast is for rates on 30-year fixed-rate loans to average 6 percent in Q4 (October, November and December), data tracked by Optimal Blue shows borrowers were locking in rates averaging 6.43 percent Wednesday.

Mortgage rates “have risen meaningfully following strong economic data, presenting upside risk to our rate outlook but also downside risk to our sales projection,” Fannie Mae economists acknowledged. “Regardless of mortgage rate volatility, ‘lock-in’ effects still remain strong, and we expect a recovery in home sales to be modest in the near term.”

Rather than a recession, Fannie Mae’s Economic and Strategic Research (ESR) Group sees economic growth (as measured by gross domestic product, or GDP) slowing from 3.2 percent in 2023 to 2.3 percent this year and 2.0 percent next year.

“While a strong economic outlook will support home purchase demand, this will also likely lead to higher mortgage rates, which would keep sales of existing homes more subdued,” Fannie Mae forecasters said. “In fact, the modest bump in purchase mortgage applications seen in September has now leveled off in the most recent week’s data.”

Home prices bolster mortgage originations

If home sales do grow as expected next year and home prices in many markets continue to appreciate, Fannie Mae forecasts mortgage originations will grow by 28 percent next year, to 2.14 trillion.

Purchase loan originations are projected to grow by 16 percent, to $1.52 trillion, while refinancings could surge 70 percent, to $625 billion.

Building boom continues to cool

Although the pandemic-era building boom continues to cool, Fannie Mae expects single-family housing starts to hold steady at 996,000 next year. Last month, Fannie Mae was expecting 989,000 2025 single-family housing starts.

“With continued resilience in the labor market, and the low level of existing homes for sale, we expect the new home sales market to continue to remain a bright spot,” Fannie Mae economists said. “We have upwardly revised our new home sales expectations for 2024 and 2025, while slightly increasing our single-family housing starts forecast.”

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Email Matt Carter

Governor Gavin Newsom’s Proposition 1, a mental health bond measure that would provide $2 billion to build housing that was presented to voters on the California ballot last week, is leading by a whisker.

The bond measure, which totals $6.38 billion, was leading by 50.3 percent on Sunday night, with 2.7 million votes, according to the California Secretary of State.

The final tally isn’t expected for days or weeks, the Los Angeles Daily News reported.

Newsom had trumpeted the measure as a way to get “people off the streets, out of tents and into treatment.” 

Prop. 1 would direct $4.4 billion to fund 10,000 mental health beds and $2 billion for homeless housing projects, half of which would be reserved for veterans with mental illness or issues with drugs and alcohol.

The measure would also require the state’s 58 counties to spend 30 percent of Mental Health Services Act tax dollars on housing. Last year, the mental health revenue was $1 billion.

It would require the state’s counties to spend half of that money on the chronically homeless or people living in tents.

The governor said the initiative would create 11,000 new homes through new housing construction or by converting hotels, motels and other buildings into homes.  

Over a 30-year span, the nearly $6.4 billion bond would cost $9.3 billion, including interest, according to a state Legislative Analyst Office analysis. 

California is now home to nearly a third of the nation’s homeless residents. The state’s homeless population grew 6 percent last year to more than 181,000 people, the largest estimate of any state.

The Yes on Prop 1 campaign raised nearly $21 million, and included backing by the National Alliance on Mental Illness California, California Teachers Association and California Chamber of Commerce.

In comparison, the “No on Prop. 1” campaign raised very little, and was led by mental health advocates such as Disability Rights California, who fear that changing funding priorities for the Mental Health Services Act will result in service cuts. They also fear new treatment beds will compel people into involuntary treatment.

Other opponents, such as the Howard Jarvis Taxpayers Association, object to the high amount of government spending.

Barring a major shift in voting patterns in the ballots yet to count, it is likely — but not certain — the proposition will pass.

— Dana Bartholomew

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The servicing segment drove most of Pennymac Financial Services’s earnings in the third quarter of 2023, just like its peers, Mr. Cooper and Rithm Capital. 

Profits at the California-based lender increased by 60% from July to September, compared to the prior quarter, with originations also boosting performance. 

Pennymac announced on Thursday a $92.87 million net income in Q3 2023, up from $58.2 million in the previous quarter but down from $135 million in Q3 2022, per Securities and Exchange Commission (SEC) filings. 

David Spector, chairman and CEO, told analysts that the company had “outstanding results” even as mortgage rates neared 8% in Q3.

According to Spector, many of the borrowers who are locked in a low, fixed-rate mortgage are incentivized to stay in their homes. This has led to an “extremely low inventory of homes for sale, driving expectations for the lowest unit origination volume since 1990.” 

“Though the current origination market remains constrained, mortgage banking companies with large servicing portfolios are better positioned to offset the decline in profitability that has resulted from these lower origination volumes,” Spector said. 

In servicing, Pennymac delivered a pretax income of $101.2 million in Q3 2023, up from $46.5 million in Q2 2023. However, the profits were down from $145.2 million in the same period a year ago.

Pennymac’s servicing portfolio grew to $589.4 billion in unpaid principal balance (UPB) as of Sept. 30, up 2% from June 30. The increase happened because production volumes more than offset prepayment activity, which is low due to higher mortgage rates.

As of Sept. 30, nearly 20% of the company’s servicing portfolio consisted of mortgages with rates over 5%. Executives see opportunities for the consumer-direct channel to offer customers refinances when interest rates fall.

Loan production

Spector told analysts that the company’s multichannel approach to production enables consistent access to the origination market in the current high-rate environment. 

In the production segment, Pennymac had a $25.2 million pretax income from July to September, compared to $24.4 million in the prior quarter and $38.6 million in the same period of 2022. 

Pennymac’s total loan acquisitions and originations reached $25.1 billion in UPB in Q3 2023, up 0.8% from the previous quarter but down 4% from the same quarter last year. 

The correspondent channel continues to be the most relevant for Pennymac, with the number of sellers increasing to 829 at the end of the quarter, compared to 800 on June 30, 2023. 

In this channel, the company reached $23.9 billion in UPB in Q3 2023, compared to $21.6 billion in the previous quarter and $23 billion in the same period last year. 

Spector said banks are stepping back from the correspondent channel amid expectations of increasing capital requirements through the Basel III rules. Also, the channel tends to represent a larger percentage of total industry originations in a low-volume environment because liquidity becomes relevant for many sellers.  

Consumer-direct, interest-rate lock commitments (IRLCs) came in at $1.7 billion in UPB, down from $2.2 billion in the previous quarter and $3.8 billion from the third quarter of 2022. 

Dan Perotti, senior managing director and chief financial officer, told analysts that volumes in consumer direct remained low, “but margins increased meaningfully from the prior quarter due to a greater proportion of closed-end second liens, which have lower average balances.” 

Meanwhile, in the broker-direct channel, Pennymac’s commitments were at $3 billion in Q3 2023, up 7.1% quarter over quarter and 57.9% from the same period in 2022. 

Pennymac’s strategy has been to position itself as a “strong alternative” to the top leaders in the channel – United Wholesale Mortgage and Rocket Pro TPO. 

Spector told analysts that the company doesn’t see margins under severe pressure amid “more rational prices” in the market, which means he expects profitability in production in Q4 2023. 

Pennymac estimates that it represents 21.2% of the correspondent channel, 4.2% of the loan servicing market, 3.1% of the broker-direct space and 0.6% of the consumer-direct segment. 

PFSI’s stock closed Thursday at $64.09, down 1.73% from the previous day. The share remained unchanged in the after-market hour.