2021 Finishes Strong, But Inflationary Concerns Weaken 2022 Projections

The Fannie Mae Economic and Strategic Research (ESR) Group boosted its expectation for full-year 2021 economic growth to 5.5% in its December commentary, up 0.7% from November’s projection.

The group cited “stronger-than-anticipated consumer spending and inventory investment data” as the reason for its revised projection.

Total home sales are now expected to increase 7.1% in 2021 rather than 5.3%. Total mortgage originations are expected to be $4.5 trillion, up from $4.4 trillion.

But it also revised its 2022 expectations, downgrading its 2022 growth forecast from 3.7% to 3.2%. Though recent data appears strong, the group noted it “likely reflects a pull-forward of activity from the first half of 2022 and is unlikely to be sustained.”

Inflation is the primary reason for this pessimistic outlook.  The group projects it to reach approximately 7.0% annualized in the first quarter of 2022 before gradually decelerating to 3.8% over the course of the year.

The group says home sales will drop next year by 1.4%, driven by a continuing stock shortage and affordability constraining buyers. Sales will fall even further in 2023, dropping an additional 3.8%.

Originations in 2022 and 2023 are expected to be $3.4 trillion and $3.1 trillion, respectively.

“While the economy picked up steam late in the year, unfortunately, so did inflation, and the market expects the Fed to recalibrate its monetary policy as a result,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. 

“The public registered its ill-will toward inflation in our most recent National Housing Survey, which found that 70% of consumers believe the economy to be on the wrong track – the most since 2011, when consumer sentiment was weighed down by the aftermath of the Great Recession. The Fed recently acknowledged that inflation is unlikely to be transitory, and it will now attempt to engineer a soft landing, one in which inflation moderates to acceptable levels and economic growth decelerates but doesn’t contract. Whether the Fed is able to thread this historically difficult policy needle is shaping up to be one of the most consequential economic storylines of 2022.”

The Federal Open Market Committee recently announced it will double the pace of tapering its pandemic asset purchase program in response to rising inflation, and signaled it would likely raise interest rates next year. This would be its first rate hike since March 2020.

The Fed maintained that inflation would be a “transitory” problem for much of this year, but chairman Jerome Powell decided to “retire” the word. Inflation is at a 39-year high.

Mortgage Bankers Association Senior Vice President and Chief Economist Mike Fratantoni has said he expects housing inflation to continue. “We’re really pretty confident that [housing costs] are going to keep rising even after some of the things like used car prices and other things that are directly related to supply-chain constraints revert,” he said.

“Those things are going to be transitory once those supply chain issues go away. But I think the shelter price component is going to persist for a long time – like years.”