Fannie Mae’s 2021 economic forecast improved in May thanks to stronger-than-expected real GDP growth and an improved outlook for consumer spending. However, the mortgage giant downgraded its expectations for 2022 as supply constraints become more prevalent.

Fannie Mae’s Economic and Strategic Research (ESR) Group raised its full-year 2021 forecast slightly from 6.8% in April to 7% in March. Despite expectations that the economy will continue to grow over the forecast horizon, the group revised its 2022 forecast to 2.8%, down from 3% in the previous month.

“While most indictors point toward brisk economic growth over the second quarter, the combination of a disappointing employment report and an unexpectedly strong burst of inflation has raised in the minds of many market participants the potential confluence of broad-based supply restraints, very strong house price growth, and the posture of monetary and fiscal policies,” said Fannie Mae chief economist Doug Duncan.

Duncan said that the supply-chain headwinds have yet to impact mortgage rates. However, he noted that the rise in the 10-year Treasury contains an increased expected inflation component and has prevented mortgage rates from retreating further from their recent temporary peak.

On housing, the group projects a 6.3% increase in home sales this year. While the shortage of existing homes for sale is heightening demand for new homes, soaring lumber costs, the lack of buildable lots, and labor scarcity are limiting the production of single-family homes. Still, housing starts are expected to be 24.8% higher in 2021 than in 2020.

Meanwhile, the ESR group’s mortgage origination forecast remained mostly unchanged at $4.1 trillion in 2021. However, the low mortgage rate environment has caused a shift in refinance share, which is projected to edge up a couple of percentage points to 55%.

“Stronger inflation and a resultant move in interest rates are risks that we believe should be monitored,” Duncan said. “As the effects of expansionary monetary policy continue to work their way through the economy, inflationary expectations may continue to 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. 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.”