Fannie Mae: Housing Market May Be More Vulnerable Than Projected

According to a new Fannie Mae housing report, single-family housing was an unintended beneficiary of the pandemic and its associated policy response. Data found that during the pandemic, mortgage rates reached historically low levels, with the average 30-year fixed mortgage rate hovering around 3% though the end of 2021. Despite a low inventory-to-sales ratio during this time period by historical standards, as well as rising home prices, both home sales and purchase mortgage originations reached record highs in 2021.

Anecdotal and analytical evidence suggest that the pandemic prompted people to move from smaller housing units in high-density city centers to larger homes in lower-density areas; and this was particularly true of first-time homebuyers. Our researchers studied this phenomenon, and our survey findings illustrate the primacy of financial considerations over the benefits of physical space and location in influencing homebuying behavior during the pandemic.

Overall, the rise in home sales was fueled by both first-time homebuyers and move-up buyers. In fact, demand was so strong that the median number of days that homes were on the market shortened from 74 in 2017 to 46 in 2021. We are now in a different phase of the economic and housing cycle. From the end of 2021 through September 2022, mortgage rates increased from 3% to over 7%. This rapid rate increase contributed to the pace of total home sales declining from an annualized pace of over 7 million units in January 2022 to approximately 5 million units in October 2022.

The latest Fannie Mae forecast doesn’t expect the annualized pace of total homes sales to exceed 5 million units again until 2024. One outstanding question from the pandemic-related boom in home sales regards what actually drove purchase demand to increase so substantially. Were buyers motivated more by physical space or financial considerations, or was it a combination of both? In 2021, Fannie Mae conducted two survey studies among consumers who purchased a home for primary residence during the pandemic. The responses in those surveys help to explain why home sales declined in 2022 and continue to inform our outlook for the years ahead.

Fannie Mae conducted a telephone survey in Q1 of 2021 among homeowners in Fannie Mae’s Single-Family Guaranty Book of Business with primary-residence purchase mortgage loans originated in 2020. Respondents were asked if they accelerated their home purchase due to the COVID-19 pandemic or because of low interest rates. Some 56% of respondents said the pandemic itself neither accelerated nor slowed their home purchase timeline.

Among first-time homebuyers, nearly 30% said it accelerated their home purchase decision, compared to only 13% of repeat homebuyers (often described as move-up buyers). In contrast, the impact of low interest rates on home purchase timing was much stronger than the impact of the pandemic, especially among first-time homebuyers. Some 48% of homebuyers said they accelerated their home purchase because of low interest rates, compared to 21% saying they did so because of the pandemic. Among first-time homebuyers, 53% said they navigated the homebuying process faster because of low interest rates, compared to 29% saying they did so because of the pandemic.

To read the full report, including more data, charts and methodology, click here.