Housing Sector Awaits Improvement in Affordability; Modest Recession Still Expected

Rhea-AI Summary

Fannie Mae forecasts a modest recession beginning in early 2023, driven by elevated mortgage rates and home prices constraining housing activity. The Economic and Strategic Research Group predicts a 0.6% decline in GDP growth for 2023 and a cumulative 6.7% drop in home prices over two years, although they do not foresee a repeat of the Great Financial Crisis. Existing home sales are expected to remain depressed due to affordability issues, while new home sales may outperform. Economic signals indicate a potential soft landing, although a tight labor market could lead to prolonged elevated rates by the Federal Reserve.

Positive

• Predicted cumulative 6.7% home price decline may improve affordability over time.
• New home sales expected to outperform existing home sales due to constrained activity.

Negative

• Forecasts suggest a modest recession beginning in early 2023.
• GDP growth forecast for 2023 is negative 0.6%, indicating economic contraction.
• High mortgage rates and home prices limit housing activity and sales.

Elevated Mortgage Rates and Home Prices Expected to Continue to Limit Housing Activity

WASHINGTON, Jan. 20, 2023 /PRNewswire/ -- Despite ending the year on a stronger-than-anticipated footing, the economy is still expected to slip into a modest recession beginning in the first half of 2023, according to the January 2023 commentary from the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group. The ESR Group views the current rate of consumption as unsustainable relative to disposable income and forecasts that an eventual retrenchment of the consumer will be a major factor in the upcoming economic contraction. The ESR Group predicts Q4/Q4 GDP growth for 2023 to be negative 0.6 percent, one-tenth lower than its previous forecast. Noting cooling inflationary pressure in the past three Consumer Price Index (CPI) reports, the ESR Group believes the Federal Reserve is likely nearing its eventual terminal rate but notes that upside risk remains for tighter-for-longer monetary policy should a recession be delayed or avoided altogether, or, alternatively, if inflation measures fail to further cool.

Further, the ESR Group expects a cumulative 6.7 percent home price decline over the next two years as housing affordability remains unsustainably stretched. A repeat of the Great Financial Crisis is not expected, however, as far fewer borrowers are facing interest rate shocks, loan workout and modification programs are more robust, and aggregate residential real estate and the broader financial system are substantially less leveraged compared to the 2006-2008 period. Instead, housing affordability is forecast to gradually improve over the longer term due to a combination of home price declines, modestly lower mortgage rates, and stronger-than-usual nominal income growth. Ongoing affordability challenges and the "lock-in effect" -- in which many current homeowners have a financial disincentive to list their homes due to the higher mortgage rate environment -- have the ESR Group expecting existing home sales activity to remain constrained, creating an avenue for the new home sales trend to comparatively outperform existing home sales in coming years.

"There are economic signals pointing to recession but also signs that a 'soft landing' may be in the offing," said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. "In our view, the balance still suggests a modest recession, particularly if the Federal Reserve maintains its focus on labor market tightness. While limited and tentative signs of a slowing labor market are appearing, overall, labor remains robust. The market sees the Federal Reserve easing in the second half of the year, which can be interpreted either as a view that the recession is forthcoming or that the slowdown in inflation will lead to a less restrictive monetary posture. If the latter occurs, the lower accompanying rates will likely set the stage for a pickup in housing activity going into 2024, as can be seen in our latest forecast. However, if the market is wrong – and the Federal Reserve does as it has stated it will do and holds the federal funds target at the terminal rate longer to ensure no inflation resurgence – then the accompanying rate decline and associated revival in housing activity will likely be delayed. In either case, we expect 2023 to be a slow year for the housing market."

Visit the Economic & Strategic Research site at fanniemae.com to read the full January 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. 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:
fanniemae.com | Twitter | Facebook | LinkedIn | Instagram | YouTube | Blog

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https://www.fanniemae.com/news

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1-800-2FANNIE

 

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SOURCE Fannie Mae

FAQ

What is Fannie Mae's forecast for the housing market in 2023?

Fannie Mae anticipates a modest recession in 2023 due to high mortgage rates and home prices limiting housing activity.

What is the expected GDP growth for Fannie Mae in 2023?

Fannie Mae's Economic and Strategic Research Group forecasts a GDP growth decline of 0.6% for the year 2023.

How much are home prices expected to decline according to Fannie Mae?

Fannie Mae predicts a cumulative decline of 6.7% in home prices over the next two years.

What impact will the Federal Reserve have on Fannie Mae's housing forecast?

The Federal Reserve's actions regarding interest rates will significantly influence housing activity, with a tight labor market potentially leading to prolonged high rates.

What does Fannie Mae say about existing home sales in 2023?

Fannie Mae expects existing home sales to remain constrained due to ongoing affordability challenges, creating an opportunity for new home sales to outperform.