Elevated Inflation, Higher Interest Rates Expected to Take Toll on Consumer Spending
Fannie Mae's June 2022 Economic Outlook indicates that elevated inflation and higher interest rates will negatively impact economic growth and home sales. The projected growth for 2022 is now at 1.2%, with a potential modest recession anticipated in late 2023. Home sales are forecasted to decline by 13.5% this year, and mortgage originations are expected to drop to $2.6 trillion in 2022 and $2.2 trillion in 2023. The report highlights the significant rise in mortgage rates as a primary constraint on the housing market, leading to reduced refinance activity.
- Predicted economic growth for 2022 at 1.2%.
- Home sales forecasted to only modestly decline despite higher rates.
- Expected home sales to fall 13.5% in 2022.
- Projected decline in mortgage originations to $2.6 trillion in 2022 and $2.2 trillion in 2023.
- Residential fixed investment forecasted to decline 8.6% in 2022.
- Anticipation of a modest recession expected next year.
Housing Predicted to Drag on Growth Through 2023 as Financial Conditions Tighten
WASHINGTON, June 16, 2022 /PRNewswire/ -- The compounding effects of elevated inflation and higher interest rates are expected to further weigh on economic growth and home sales as the year progresses, with full-year 2022 growth now forecast at a slightly reduced 1.2 percent and expectations of a late-2023 modest economic contraction unchanged, according to the June 2022 commentary from the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group. While consumers' resilience to the predicted financial stress remains an open question, the ESR Group now forecasts personal consumption growth to slow from 4.2 percent in Q2 2022 to 1.9 percent and 1.3 percent, respectively, in Q3 2022 and Q4 2022. Residential fixed investment, driven in part by an even further reduced home sales forecast, is projected to decline 8.6 percent in 2022 and 6.5 percent in 2023 – the largest percentage declines among the major GDP components.
Substantially higher mortgage rates are now the housing market's primary constraint. The ESR Group expects total home sales to fall 13.5 percent in 2022 – down even further from its 11.1 percent projected decline last month – and, correspondingly, for mortgage originations to move downward to
"The market's expectations of the necessary Federal Reserve response to persistent broad-based inflation continue to adjust," said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. "Tightening financial conditions are slowing economic activity, and consumers are drawing down savings and increasingly relying on credit cards as they seek to maintain current levels of consumption."
"The significant, sudden rise in interest rates is beginning to be felt widely as employment growth slows and stock market valuations fall," Duncan said. "Nowhere is this more evident than in housing affordability measures, with the prospective monthly payment on a typical new mortgage climbing dramatically. As a result, both new and existing home sales continue to slow, while refinance activity has fallen substantially, with what's left largely consisting of equity extraction."
Duncan continued: "Our view continues to be that the magnitude of response required of monetary and fiscal tightening to return inflation to the Federal Reserve's target will likely result in a recession, which we currently expect will be modest and occur next year. Notably, the recent market response to continued heightened inflation suggests that the predicted recession could occur sooner and be deeper than our current baseline forecast."
Visit the Economic & Strategic Research site at fanniemae.com to read the full June 2022 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. 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.
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