Fannie Mae, the largest buyer of mortgages in the US, just made some bold predictions about not only housing, but an upcoming recession. Their new predictions are a rapid departure from just a few months ago. What does Fannie Mae predict for the economy and housing?
What are Fannie Mae’s new predictions for housing?
Our updated forecast includes an expectation of a modest recession in the latter half of 2023 as we see a contraction in economic activity as the most likely path to meet the Federal Reserve’s inflation objective given the current rate of wage growth and inflation. Since our last forecast, monetary policy guidance has shifted in a hawkish direction, and markets have responded with rapid increases in interest rates, signaling a belief that brisker tightening is likely to occur. While a “soft landing” for the economy is possible, which is where inflation subsides without economic contraction, historically such an outcome is an exception, not the norm. With the most recent inflation readings at levels not seen since the early 1980s and wage growth exceeding that which is consistent with a 2-percent inflation objective, we believe the odds of a soft landing are even lower. Returning to the Fed’s policy target, therefore, likely necessitates economic growth slowing sufficiently to lead to a rise in the unemployment rate, which would cool wage and price pressures.
What does Fannie Mae predict for interest rates?
We expect this to unfold in part via higher mortgage rates that lead to slower housing activity. We have downgraded our total home sales forecast for 2022 to a decline of 7.4 percent (previously a 4.1 percent decline) followed by a decrease of 9.7 percent in 2023 (previously a 2.7 percent decline). House price growth, as measured by the newly released Fannie Mae Home Price Index, is forecast to decelerate from the most recent reading of 20.0 percent annual growth in Q1 2022 to 10.8 percent growth by year end. We expect this to be followed by further deceleration in 2023 to 3.2 percent growth on a Q4/Q4 basis. We forecast single-family mortgage originations to total $2.8 trillion in 2022 and to total $2.4 trillion in 2023, down from our previous forecast of $3.0 trillion and $2.7 trillion, respectively. It should be noted that interest rates have moved up further than we had expected since the completion of our interest rate forecast at the start of the month, representing downside risks to our housing forecast.
Will this be a repeat of 2008?
While growing affordability constraints point to strong pressure for home prices to converge toward a more historically normal relationship to household incomes, we are not expecting the next recession to result in a 2008-like housing or financial crisis. Mortgage credit quality is far superior in the current period. Both residential real estate in aggregate and the mortgage finance system are far less leveraged now, and mortgage servicers and public policy are better equipped to deal with delinquencies and to provide loan modifications or other home preservation strategies as needed. There also continues to be a long-running undersupply of homes available relative to demographic demand, and we therefore expect new home construction to play a leading role in the eventual recovery.
How accurate are the new predictions?
Whenever an organization or group makes a bold prediction, I always take it with a grain of salt. In this case, others are starting to line up behind Fannie’s predictions.
“The chances of [Fed officials] achieving a soft landing in this cycle is almost zero, because every time they’ve had to push up the unemployment rate in the past, they’ve also ended up in recession,” William Dudley, the New York Fed’s president from 2009 until 2018, said on Friday.
Many analysts doubt the Fed can pull off a soft landing, including Mssrs. Lacker and Plosser, who were hawks often at odds with Mr. Dudley’s easy money views when they were with the central bank. But they all now agree about recession risks.
The Fed is “in a dangerous position of having to raise interest rates more rapidly than it might prefer to, with the risk of a financial turmoil,” Mr. Plosser said. “It didn’t have to be this way.” (WSJ)
Summary
With inflation still raging high above the feds target, the odds of a “soft landing” without a recession are becoming less probable. The Federal Reserve will be forced to raise rates faster than the market anticipated just a few months ago. These higher rates will filter through the economy with higher borrowing costs and less liquidity. This will ultimately lead to an economic slowdown which will halt the gangbuster housing market we have seen the last several years.
A separate Federal reserve report showed that there is growing concern that U.S. house prices are again becoming unhinged from fundamentals which could lead to a bubble and ultimately larger correction. Currently the prediction is for a mild slowdown, but the more inflation continues the higher the probability of a deeper correction and an abrupt end to the real estate party.
Additional Reading/Resources
- https://www.fanniemae.com/research-and-insights/forecast/inflation-rate-signals-tighter-monetary-policy-and-threatens-soft-landing
- https://www.thestreet.com/investing/recession-2022-fannie-mae
- https://www.dallasfed.org/research/economics/2022/0329
- https://www.wsj.com/articles/trio-of-former-fed-officials-lament-central-banks-actions-see-good-odds-of-recession-11651265679?mod=mhp
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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine, The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
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