Fannie Mae’s Economic and Strategic Group has revised a number of its real estate forecasts for this year on the back of ongoing housing market supply constraints, sub-3% mortgage rates and a huge 300% increase in lumber prices since 15 months ago.

ESR said in a report last week that a 3.7% decline in existing home sales in the U.S. in March has highlighted a number of issues with the housing market that are likely to lead to a lower than expected number of transactions in 2021. That will happen even though demand for existing homes has never been greater.

“We have long expected that a combination of waning COVID-19-induced movement into single-family housing and continued tight inventories would lead to a slowing pace of existing home sales as the year progresses,” the ESR group said. “However, the latter factor appears increasingly more limiting.”

Fannie Mae’s ESR Group studies existing data and analyzes historical and emerging trends, and conducts surveys of consumers and mortgage lenders in order to make forecasts about the economy, housing and mortgage markets.

It its latest report it noted that record-high median home prices continue to inch upwards in every region of the U.S. and that this is unlikely to stop soon. One problem is that homebuilders can’t provide much relief due to the high prices of lumber and other building materials, plus a lack of building lots and difficulty in hiring enough subcontractors.

ESR cited a near record low housing supply of just 2.1 months at the end of March, far below the 6-months' supply that real estate experts say is indicative of a healthy housing market. Fannie Mae revised its single-family housing starts to increase 24.8% in 2021 compared to 2020, but has yet to take into account a 13.4% drop in April.

“While the limited supply of homes available for sale continued to drag on sales, the month’s decline was in part driven by the cold weather and related power outages a month earlier on account existing sales are measured at the point of closing, which typically occurs 30-45 days after signing,” the ESR group said. “While the decline was expected, recent data suggest that the forecast rebound in April sales will be smaller than we had previously anticipated.”

The ESR group has modestly revised its real GDP expectations up to 7% from 6.8%, due to consumer spending picking up as the economy reopens. However, Fannie Mae said it expects the unemployment recovery to be positive but slow. This will incentivize more potential homeowners to try and take advantage of current low mortgage rates and possibly give a boost to the housing market.

Because mortgage rates have fallen under 3% again, ESR has revised its forecast on purchase and refinance volume. It has slashed $43 billion from its 2021 purchase volume forecast and now estimates that purchase mortgages will reach $1.8 trillion by the end of the year. It has also updated its refinance origination volume to $2.2 trillion, up $125 billion from the previous month’s forecast.

“We expect refinance volume in 2022 to total $1.1 trillion, an upward revision of $43 billion from last month’s forecast, but a decline of 49% from 2021,” said the ESR group. “At current interest rates, we estimate around 51% of all outstanding mortgages have at least a 50-basis point incentive to refinance, up from 42% in last month’s forecast given the recent rate declines.”

Fannie Mae Chief Economist Doug Duncan said that he’s keeping an eye out for stronger inflation, which would likely push interest rates higher. As the effects of expansionary monetary policy work through the economy, he said inflationary expectations should also rise.

“This could lead to prices rising further even with growth concurrently slowing in the presence of diminished labor market slack and waning fiscal policy support,” said Duncan. “If such a scenario were to play out, the question then becomes whether this necessitates a response by the Federal Reserve. While momentum in the housing market will likely continue in the near term, this is an increasingly important consideration for 2022.”