Banking System Instability May Prove Catalyst for Recession

Rhea-AI Summary

Fannie Mae's Economic and Strategic Research Group has revised its GDP forecast for Q1 2023, now expecting a modest recession to start in the second half of 2023, pushed back from Q2 2023. Increased instability in the banking sector is likely to affect lending and consumer confidence. The ESR Group anticipates that home sales will remain subdued due to affordability constraints and the 'lock-in effect' preventing homeowners from moving. They also caution that current banking issues may restrict jumbo mortgages and construction loans. However, they note that the housing market could moderate any future recession.

Positive

• Revised GDP forecast for Q1 2023 upward, indicating slightly better economic conditions than previously expected.
• Potential for housing market to moderate future recession effects due to pent-up demand.

Negative

• Expectations of a modest recession beginning in H2 2023 due to banking instability.
• Subdued home sales projected due to ongoing affordability constraints and the 'lock-in effect'.
• Banking instability may restrict the availability of jumbo and residential construction loans.

Housing Activity Expected to Remain Subdued as Most Homeowners Remain 'Locked In' to Low Mortgage Rates

WASHINGTON, March 24, 2023 /PRNewswire/ -- Due to stronger-than-expected economic data, Fannie Mae's Economic and Strategic Research (ESR) Group revised upward its first quarter 2023 GDP forecast, which it finalized prior to the recent financial turmoil, and now projects a modest recession to begin in the second half of 2023, compared to the previously forecasted second quarter of 2023. While uncertainty has risen following turbulence in the banking sector, the ESR Group noted in its latest monthly commentary that bank failures often foreshadow economic downturns. As such, the ESR Group believes that the recent events may act as the catalyst that tips an already precarious economy into recession, primarily via the combination of tighter lending standards among small and midsized regional banks and weakened business and consumer confidence.

Importantly, the ESR Group does not anticipate a repeat of the 2008 Financial Crisis. Instead, it believes the Savings & Loan Crisis from the 1980s to be a better analog, specifically regarding the significant interest rate rises that set in motion banking system stress and the resultant macroeconomic effects that contributed to a modest recession in 1991. The ESR Group also highlighted downside risk to its interest rate forecast, as banking-related stress may slow the economy and relieve inflationary pressure – in effect relieving the Federal Reserve of potentially having to raise rates as high as previously expected. 

While home sales experienced a large bump in February following a pullback in mortgage rates, the ESR Group noted that recent mortgage application data suggest that last month's level of homes sales will be temporary. Additionally, the ESR Group posits that ongoing banking instability may affect the availability of jumbo mortgages and residential construction loans due to the high concentration of those originations stemming from small and midsized banks. The ESR Group expects home sales to remain subdued due to ongoing affordability constraints and the "lock-in effect" continuing to create a strong financial disincentive for homeowners to move.

"Inflation has now been joined by financial stability concerns as threats to sustained growth," said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. "These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening – but this may well be the catalyst for the modest recession we've been expecting since April 2022."

Duncan continued: "While housing writ large has responded to the Fed's monetary tightening in a relatively predictable fashion, the rapid uptick in home sales in response to modest rate declines earlier this year corroborates our long-standing expectation that the housing sector will help moderate any future recession due to the significant pent-up demand."

Visit the Economic & Strategic Research site at fanniemae.com to read the full March 2023 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae's Economic & Strategic Research Group, please click here.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. See the March 2023 Economic Developments Commentary for a discussion of the conditions underlying the ESR Group's expectations. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

About the ESR Group
Fannie Mae's Economic and Strategic Research Group, led by Chief Economist Doug Duncan, studies current data, analyzes historical and emerging trends, and conducts surveys of consumer and mortgage lender groups to provide forecasts and analyses on the economy, housing, and mortgage markets. The ESR Group was recently awarded the prestigious 2022 Lawrence R. Klein Award for Blue Chip Forecast Accuracy based on the accuracy of its macroeconomic forecasts published over the 4-year period from 2018 to 2021.

About Fannie Mae
Fannie Mae advances equitable and sustainable access to homeownership and quality, affordable rental housing for millions of people across America. We enable the 30-year fixed-rate mortgage and drive responsible innovation to make homebuying and renting easier, fairer, and more accessible. To learn more, visit:
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https://www.fanniemae.com/news

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SOURCE Fannie Mae

FAQ

What is Fannie Mae's current GDP forecast for Q1 2023?

Fannie Mae has revised its GDP forecast for Q1 2023 upward, now expecting a modest recession to start in the second half of 2023.

How might the banking system instability affect home sales?

Fannie Mae expects home sales to remain subdued due to ongoing affordability constraints and homeowners being 'locked in' to low mortgage rates.

Will the banking sector issues lead to another financial crisis like 2008?

Fannie Mae does not anticipate a repeat of the 2008 Financial Crisis, instead likening current conditions to the Savings & Loan Crisis of the 1980s.

How could the housing market influence a future recession?

The housing market may help moderate recession impacts due to significant pent-up demand, as noted by Fannie Mae's Economic and Strategic Research Group.