Jump in Long-Term Interest Rates Expected to Weigh on Economy

Rhea-AI Summary

Home prices expected to decelerate as mortgage rates rise, but economy shows signs of resilience

Positive

• Home prices have proven more resilient than expected, leading to an upward revision in the 2023 home price forecast from 3.9% to 6.7% on a Q4/Q4 basis.
• The economy is expected to experience a mild economic downturn in the first half of 2024 due to the recent rise in interest rates.
• Real GDP projection for 2023 revised upward to 2.5% on a Q4/Q4 basis.
• Consumer resiliency and recent data revisions suggest the likelihood of an economic 'soft landing.'

Negative

• The rapid rise in long-term interest rates is expected to weigh on future economic growth.
• Affordability constraints and rising mortgage rates are dampening housing activity and complicating housing affordability into 2024.
• The annualized pace of existing home sales is predicted to fall below 4 million units in the fourth quarter.

Home Prices Prove Resilient through Third Quarter, but Deceleration Likely as Mortgage Rates Move Higher

WASHINGTON, Oct. 16, 2023 /PRNewswire/ -- The rapid rise in long-term interest rates over the past few months will likely weigh on future economic growth, according to the October 2023 commentary from the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group. Even barring another acute credit event, which the ESR Group warns is more likely now that rates are moving rapidly again, the turning of the credit cycle is ongoing and, over time, is expected to weigh on consumption, business investment, and hiring as low-interest debt is rolled into higher rates. Still, the ESR Group notes that the economy likely faces fewer structural headwinds than previously thought after significant updates to the national accounts showed real consumption and incomes in better balance than had been reported previously. When combined with other incoming data, the ESR Group revised upward its 2023 real GDP projection by three-tenths to 2.5 percent on a Q4/Q4 basis but continues to expect significant slowing in economic growth through the end of the year and into 2024.

While incoming purchase mortgage application data have highlighted the downside risk to housing activity amid a mortgage rate environment that is now well over 7 percent, home prices have proven more resilient than expected, causing an upward revision to the ESR Group's 2023 home price forecast from 3.9 percent to 6.7 percent on a Q4/Q4 basis. The ESR Group continues to expect home price growth to decelerate in 2024 as affordability remains extremely constrained. The ESR Group notes that further declines in home sales from an already low level due to the run-up in mortgage rates will likely be muted relative to the slowdown in 2022, but it still predicts the annualized pace of existing home sales to fall below 4 million units in the fourth quarter. New home sales continue to hold up better than existing due to ongoing inventory constraints, though the ESR Group's forecast calls for a modest deceleration in both new single-family sales and starts in coming quarters.

"Personal consumption has not only remained resilient, but recent official data revisions indicate that the consumer has been in a better position than previously thought, increasingly the likelihood of an economic 'soft landing,'" said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. "However, despite consumer resiliency, the recent rise in interest rates has been precipitous, and in past environments – even with less severe interest rate shocks – this has led to economic dislocations. As such, we still expect to see a mild economic downturn in the first half of 2024. While the rate of inflation has slowed and continues to slow, we continue to take the Federal Reserve at its word that rates will be 'higher for longer' until annual inflation stabilizes at the two-percent target; though at this time, in part because of the recent run-up in long-term rates, we do not expect additional Fed rate hikes."

Duncan continued: "In many ways, the housing market experienced four years of business in a two-year period between mid-2020 and mid-2022. With ongoing affordability constraints and rising mortgage rates, much of that activity has essentially been given back. We expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability into 2024."

Visit the Economic & Strategic Research site at fanniemae.com to read the full October 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 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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SOURCE Fannie Mae

FAQ

What is the revised home price forecast for 2023?

The home price forecast has been revised upward from 3.9% to 6.7% on a Q4/Q4 basis.

What is the projected real GDP growth for 2023?

The projected real GDP growth for 2023 is 2.5% on a Q4/Q4 basis.

What is the expected impact of the rise in interest rates?

The rise in interest rates is expected to lead to a mild economic downturn in the first half of 2024.

How has the housing market been affected by affordability constraints and rising mortgage rates?

Affordability constraints and rising mortgage rates have dampened housing activity and complicated housing affordability into 2024.

What is the predicted pace of existing home sales in the fourth quarter?

The annualized pace of existing home sales is predicted to fall below 4 million units in the fourth quarter.