MReport November 2021

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56 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST GOVERNMENT Fannie Mae Report Tracks Supply Chain, Fuel Prices Economic Impacts The speed at which the labor market recovers impacts the economy's output potential. Short- term energy prices can also impact its growth potential, inflation, and interest rates. F or the third consecu- tive month, Fannie Mae's Economic and Strategic Research Group lowered its gross domestic product growth forecast and increased its infla- tion forecast due to supply chain constraints and high fuel costs. "We revised downward our forecast for 2021 real GDP growth from 5.4% to 4.9% on a fourth quarter-over-fourth quarter (Q 4/ Q 4) basis, while the outlook for 2022 was adjusted downward to 3.6% from 3.8%," the report says. "The revision was driven by a more pessimistic view regarding the pace of supply chain issues re- solving, as well as a related slower expected transition in consumer spending away from goods and toward services." According to the report, evidence that the labor market is recovering from the COVID-19 pandemic is scant, while global energy short- ages have led to a jump in energy prices which are likely weighing on consumer sentiment and eating into their disposable income. While the report authors predict that these constraints will lessen over time, they expect these factors will continue to put a drag on economic growth through next year. The report also predicts that due to inflation pressure, they ex- pect the Federal Reserve to begin tightening its monetary policies shortly—possibly before the end of the year—and predicts an interest rate hike during the fourth quarter of 2022. "Even with a slower growth outlook, we revised upward our inflation forecast. As measured by the Consumer Price Index (CPI), we raised our forecast for 2021 annual year-end infla- tion to 5.7% from 5.4% and the Federal Reserve's preferred measure of inflation, the [Personal Consumption Expenditures] (PCE) deflator, to 4.7% from 4.6%," the report said. "The upgrade was largely due to higher-than-previ- ously-expected energy prices. We expect a deceleration next year, but anticipate inflation to remain elevated, with the core CPI and PCE measures both remaining above 3% at year-end 2022." Additionally, Fannie Mae revised its quarterly forecast of home price growth. As measured by the Federal Housing Finance Agency Purchase-Only Index, they now expect that home price appreciation will be 16.6% in 2021, up from their last estimate of 14.8% as the market continues to remain red-hot entering the last quarter of the year. They also increased their forecasts for the 2022 home price growth (2.3% to 7.4%) and the 2021 total home sales growth (3.3% to 4.7%). "Regarding mortgage origina- tions, a higher path for house price appreciation was partially offset by a higher mortgage rate forecast," the report said. "On net, our expectations for 2021 total single- family mortgage market origina- tions were little changed at $4.3 trillion, while our forecast of 2022 originations was revised upward by 2.4%; however, after rounding it remains at $3.3 trillion." The current disruptions in the country's supply chains, fuel prices, and labor market also influenced the report. According to the report, the principal risks to their forecasts came from the speeds at which global supply chains disruptions are resolved and the continued transition back into services-over-goods consump- tion ratio. The speed at which the labor market recovers to pre-pandemic levels also impacts the economy's output potential. In addition, increased short-term energy prices can also impact the economy's growth potential, infla- tion, and interest rates. "While we still view the supply chain disruptions and, to a lesser extent, labor market tightness as largely transitory, we now expect both to last even longer than we'd previously forecast—and also likely longer than the Federal Reserve anticipated," said Doug Duncan, Fannie Mae SVP and Chief Economist. "Combined with our expectation that inflation will run above-target over the forecast ho- rizon, we foresee growing clamor from market participants for the Fed to begin tightening monetary policy: first by tapering asset purchases and then, in the fourth quarter of 2022, by raising the fed- eral funds rate target range for the first time since December 2018." "Even a modest tightening of monetary policy would of course impact housing, but we expect the effects to be largely muted given current market conditions," Duncan continued. "Mortgage rates may rise in response to the tighter environment, but we expect the severe shortage of homes for sale to remain the primary driver of strong house price appreciation through at least 2022, limiting interest rate effects on home sales and home prices. Right now, we forecast mort- gage rates to average 3.3% in 2022, which, though slightly higher than 2020 and 2021, by historical stan- dards remains extremely low and supportive of mortgage demand and affordability." "While we still view the supply chain disruptions and, to a lesser extent, labor market tightness as largely transitory, we now expect both to last even longer than we'd previously forecast" —Doug Duncan, SVP and Chief Economist, Fannie Mae

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