The recent bond market volatility will cause mortgage rates to rise to a higher level than previously projected, according to Fannie Mae.

However, the rise in long-term bond yields led Fannie Mae Chief Economist Doug Duncan to increase his forecast for rates for the 30-year mortgage. The rate is expected to rise to 4.4% by the end of the year; last month Duncan forecast rates remaining in the 4% to 4.1% range throughout this year. The 30-year fixed-rate mortgage ended 2017 at 3.9%.

"We upped this year's 30-year fixed mortgage rate forecast as a result of the unexpected spike in long-term interest rates at the start of the year," he said in a press release.

The inventory shortage, not rising rates, will be a bigger factor on total home sales in 2018.

"We don't expect rates to play much of a role in total home sales, especially with anticipated stronger disposable household income growth," Duncan said. "The ongoing inventory shortages should continue to constrain sales despite otherwise ripe home buying conditions."

The forecast for originations is now $1.69 trillion this year and $1.68 trillion next year, compared with his projection in January of $1.73 trillion and $1.69 trillion, respectively.

Fannie Mae rate forecast

The first-quarter forecast was actually increased by $3 billion to $369 billion, but the second-quarter projection was reduced by $16 billion, the third quarter was cut by $19 billion and the fourth quarter cut by $10 billion.

There was a slight increase in the outlook for total home sales for this year, on higher growth in new home sales in 2018.

The gross domestic product is still expected to grow at 2.7% in 2018, with the Federal Reserve still expected to raise short-term rates at its March meeting.

"Fiscal Policy and the Fed: Stimulus/Response — our 2018 theme — will be paramount in the months ahead as the economy navigates newfound turbulence and heightened inflationary concerns," said Duncan. "While our 2018 growth forecast remains unchanged, upside and downside risks are emerging that are contingent on those policy influences."

Just the fear of inflationary pressure could complicate the Fed's attempt at a "soft landing" of the economy and that might require more aggressive monetary policy, he said.

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