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Economists: Housing Will Drive Inflation Into 2022

Earlier this year the Economic and Strategic Research Group [1] at Fannie Mae predicted full-year 2021 real GDP growth at 7%. That expectation remains fairly unchanged in the group's July 2021 [2]commentary, however, they do project significant compositional shifts related to the sources of economic growth. They expect higher-than-consensus levels of inflation through the end of 2022, a forecast partly due to the expectation that some of the more transitory pressures in the economy will give way to housing-driven inflationary pressur [3]e, they say.

"Demographic trends remain favorable for a strong housing market over the next few years, and, combined with the chronic undersupply of homes built over the last decade, upward pricing pressure is likely to remain through the forecast horizon—just not at the rate seen this spring," the report reads. "Nevertheless, we expect home price growth to become one of the more persistent drivers of inflation going forward, as other, more transitory factors diminish."

They also significantly upgraded the home price forecast, as measured by the FHFA Purchase-Only Index, to 14.8% annualized in 2021, up from its prior forecast of 8%.

However, home purchase demand is expected to soften modestly moving forward, as Mark Palim, Fannie Mae VP and Deputy Chief Economist, explained.

"While recent home price growth has been historically high, we're forecasting further home price appreciation to moderate through the remainder of the year and into 2022," Palim said. "On the supply side, we think homebuilders will be able to increase production as supply chain disruptions and labor shortages alleviate, which should add to the inventory of new and existing homes available for sale. On the demand side, we expect the increase in housing demand we saw over the past year to ease, as the impact of unique recent factors lessens, including adjustments to accommodate pandemic-related remote work arrangements, stimulus checks bolstering household savings, and record-low mortgage rates."

In addition to its upgraded home price growth projections, the ESR Group also lowered modestly its interest rate forecast. Therefore, 2021 mortgage originations are now forecast at $4.2 trillion, up from last month's forecast of $4.1 trillion, with both purchase and refinance origination activity projected to be higher.

Somewhat weaker-than-anticipated consumer and construction spending data and an updated federal spending timeline from the Congressional Budget Office led the group to update its forecast to reflect a larger share of growth occurring in the second half of the year.

They say they predict Q2 growth to clock in at 8.1%, down from last month's projected 10.1%, while third and fourth quarter growth projections were revised upward by .7 and 1.2 percentage points, respectively, to 7.1% and 6.6%.

They expect that business inventory investment and government spending will account for an increasing share of near-term economic growth, as spending by consumers shifts toward services and away from goods. Risks to the forecast are weighted to the downside, including future COVID-19 developments, supply chain and labor shortages, and inflation risk.

DS News recently interviewed Fannie Mae's Chief Economist Doug Duncan who broke down [4] factors that the team considers when conducting its fiscal forecasting.

The full July 2021 forecast from Fannie Mae's Economic and Strategic Research Group is available at FannieMae.com [5].