Fannie Mae: Hot Economy, Inflation Likely to Keep Rates ‘Higher for Longer’

(Illustration courtesy of Fannie Mae)

Stronger than expected economic and inflation data have pushed interest rates higher and financial markets to price in fewer Federal Reserve interest rate cuts this year, according to Fannie Mae’s Economic and Strategic Research Group.

“While higher mortgage rates present renewed headwinds to the expected recovery in home sales this year, as well as homebuyer affordability more generally, the Economic and Strategic Research Group notes that new listings of homes available for sale have continued to rise,” Fannie Mae said in a commentary. “While the ESR Group is forecasting existing home sales to rise modestly over the course of the year, it expects the flow of new listings to outpace home sales, which should help gradually thaw housing inventory and contribute to decelerating home price growth. However, based on incoming home price data, which continue to come in strong, the ESR Group expects home prices to rise 4.8 percent in 2024, up 1.6 percentage points from last quarter’s projection, and then another 1.5 percent in 2025.”

The commentary noted interest rate cuts appear to be on hold due to the recent mix of strong economic data and persistent inflation, but said Fannie Mae continues to forecast slowing employment and economic growth as well as progress toward the Fed’s 2% inflation target over its forecast horizon. “However, recent data have caused a reassessment of the pace of decelerating inflation, and the ESR Group now expects the Consumer Price Index to end 2024 at a 3.1 percent annual rate, compared to the 2.5 percent previously projected,” Fannie Mae said.     

Hamilton Fout, Fannie Mae Vice President of economic and strategic research, said financial markets “rapidly repriced” their interest rate expectations following hotter-than-expected inflation reports and ongoing strong payroll employment gains. “While we still expect economic growth and inflation to moderate going forward – and, thus, for mortgage rates to drift downward – interest rates existing in a ‘higher for longer’ state seems to be an increasingly real possibility in the eyes of market participants, as well as some homebuyers and sellers,” he said. “While we’ve recently seen evidence that some potential home sellers are becoming more acclimated to the higher mortgage rate environment and putting their homes on the market, the recent move upward in rates is yet another headwind to the recovery of home sales, and it intensifies longstanding affordability challenges for consumers.”