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After nearly three years of doom and gloom<\/a> in the mortgage industry, housing experts \u2014 including Fannie Mae <\/strong>economists \u2014 are expecting interest rates to ease.<\/p>\n While Fannie Mae expects mortgage rates to drop to below 6% <\/a>by the end of this year, the government-sponsored enterprise also forecasts that if there isn\u2019t significant supply growth and buyer demographics remain strong, home prices will rise once again.<\/p>\n Regarding the highly anticipated Federal Reserve<\/a><\/strong> interest rate cuts<\/a>, economists at Fannie Mae expect the reduction to come as early as May. They noted that their forecast for the U.S. economy centers around slow growth given that there are still factors in play that are highly correlated with a recession.<\/p>\n Read on to learn more about what Doug Duncan \u2013 Fannie Mae\u2019s senior vice president and chief economist \u2014 and Mark Palim \u2013 Fannie Mae\u2019s vice president and deputy chief economist \u2013 had to say about the housing market, the Fed\u2019s interest rate cut timeline and their views on overcapacity in the industry. <\/p>\n This interview was condensed and lightly edited for clarity.<\/em><\/p>\n Connie Kim<\/strong>: Fannie Mae calls for <\/em>mortgage rates to dip below 6%<\/em><\/a> by the end of this year. But you also project that the decline in rates won’t be enough to incentivize existing homeowners to move. How much will the inventory shortage contribute to the <\/em>rise in home prices<\/em><\/a> this year?<\/em><\/p>\n Doug Duncan: <\/strong>We\u2019ve had a discussion among ourselves about whether the response to declining rates is linear or nonlinear. In other words, if it drops one increment, you get one additional unit, or as it drops further, you get more and more units.<\/p>\n If mortgage rates get down to 5%, then I think there is a nonlinear piece to it. But it depends on what happens with income. If incomes are not rising, then you may not get that move, and we are forecasting slow growth. <\/p>\n If there\u2019s not a significant growth in supply and demographics are still quite strong, that could simply suggest price increases again. We have home prices increasing 3% in 2024.<\/p>\n Kim: <\/strong>Fannie Mae removed its <\/em>explicit call for a recession<\/em><\/a> in 2024 and now expects “below-trend growth.\u201d At this point, how high is the risk for a recession?<\/em><\/p>\n Duncan: <\/strong>It was more of a marginal move from our perspective. There\u2019s still a bunch of things that are highly correlated with recessions in the past that are still pointing in that direction. <\/p>\n There is an inverted yield curve, leading economic indicators have fallen for 21 months in a row, monetary aggregates are in decline and temporary work has turned down. There are seven or eight things that we watch that are still pointing that way, but the combination of all of them has not been enough to tip the market over. And with the Fed clearly making a shift <\/a>in December, financial conditions eased significantly and that\u2019s going to provide some support for them as well.<\/p>\n The market has gotten a little too enthusiastic in our view, so the change in our view on the Fed was only to change the number of cuts from three to four in 2024 with slow growth. <\/p>\n Kim: <\/strong>Compared to the beginning of January, more investors believe that an <\/em>interest rate cut <\/em><\/a>in May is more likely than a cut in March. Why do you think investors are throwing their hats in for a delayed rate cut by the Fed?<\/em><\/p>\n Duncan: <\/strong>I think that the markets were overenthusiastic, and a couple of Fed governors went on and walked it back, making statements along the lines of \u2018let\u2019s make sure we\u2019re moving carefully.\u2019 I think that was the primary thing.<\/p>\n Consumer spending numbers that came in at the end were quite strong, at least to the headline piece of that. On the flip side of that, consumer delinquencies for credit cards and auto loans are rising fairly quickly, which is a sign of stress in the consumer. <\/p>\n Kim: <\/strong>What is your expectation for the Fed\u2019s timeline to cut benchmark rates?<\/em><\/p>\n Duncan:<\/strong> May, June, December and somewhere in the middle of there, where they may pause after the June meeting to see what the data looks like. It\u2019s an election year, so it\u2019s a little tricky to figure out exactly when they\u2019ll do that.<\/p>\n Could they possibly move it up to March and May to get it out of the way of the election? They could, but I don\u2019t think they\u2019re going to be influenced that much by the election. <\/p>\n Kim: <\/em><\/strong>As mortgage rates increased, borrowers paid more points to buy them down. Do you think this will be a more permanent shift in the mortgage market even as rates stabilize?<\/em><\/p>\n Mark Palim:<\/strong> Part of what made it economical for the builders to offer rate buydowns was that the bond market was skeptical that the high rates would last long. So, the cost of buying down rates wasn\u2019t as high as it might otherwise be from the perspective of borrowers and the builders subsidizing it with a buydown. I think it depends on the conditions and what the expectations are for rates.<\/p>\n Duncan: <\/strong>The 2% buydown saves you X amount of dollars monthly for as long as the market rates reach the level that you bought it down to. You have to make a judgment on how long rates will stay above that level for you to save that amount of money.<\/p>\n