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The economy looks to be ending 2022 on a positive note, unfortunately, it doesn’t alter our view that we’ll likely enter a mild recession in the new year. Some of the late incoming 2022 data show significant slowing. While uncertainty still exists, a growing set of signs, including an inverted yield curve, weakness in the Conference Board’s Leading Economic Index, slowing consumer spending and a slowdown of manufacturing activity, support our ongoing contention that the economy is likely to contract next year.
Following an upward revision to third quarter 2022 real gross domestic product (GDP) and stronger-than-expected incoming personal consumption data to begin the fourth quarter, our latest forecast has the economy growing at a positive 0.4 percent in 2022 before entering a modest recession in the new year. We view the current rate of personal consumption as unsustainable given the combination of a low personal saving rate and an elevated ratio of debt-to-personal disposable income among consumers.
As a result, we expect the Q4 2022 GDP print to be a temporary positive blip, and for 2023 headline growth to be negative 0.5 percent, which is a modest improvement from our previous month’s forecast of negative 0.6 percent. Looking even further ahead, we expect the economy to regain its expansionary footing in 2024 and resume positive annual growth of 2.2 percent.
The Fed’s impact on the housing market
In late 2022, inflation, as measured by the Consumer Price Index, decelerated for the second consecutive month, which was certainly welcome news. Still, we expect the Federal Reserve to continue to closely monitor wage growth metrics, which have historically tended to be stickier, to help determine exactly how long it should maintain its restrictive posture.
With a recession predicted to start in the first quarter of 2023, one plausible scenario involves the Federal Reserve cutting the federal funds rate in mid-to-late 2023. However, given the Fed’s recent statements, we believe there is a significant upside risk of the Federal Reserve maintaining higher interest rates for longer.
The Federal Reserve’s views and policy decisions are central to our economic outlook over our entire forecast horizon. The recent release of its fourth quarter Summary of Economic Projections, and the associated dot plot, validated Chairman Powell’s previously stated view.
At his press conference after the November meeting, he stated that it’s not how fast the Fed tightens monetary policy (they thought they might need to slow to consider lags in effect), it’s where they stop (and he expected the December dot plot to show a higher terminal rate, which it did). It also matters how long they stay at that terminal rate. At its recent December meeting, the Federal Open Market Committee validated each of those points by slowing the pace of increase, showing a higher terminal rate and reiterating the fact that they will stay higher longer, which, of course, disappointed the markets
As HousingWire’s readership knows, housing is one of — if not the most — interest rate-sensitive sectors of the economy, and the dramatic rise in rates has slowed it considerably. We expect housing to continue to slow in 2023 despite the recent decline in mortgage rates.
Home sales and affordability
Home purchases remain unaffordable for many households due to not only the historically rapid rise in rates over the last year, but also due to the fact that house prices, though certainly slowing and in some places declining, remain elevated compared to pre-pandemic levels. Of course, refinancing is also not practical for the vast majority of current mortgage holders, which we expect will also continue to constrain mortgage origination activity. All of these factors will be at play if we enter a recession.
We modestly revised upward our total single-family home sales projections for 2022 and 2023 to 5.72 million and 4.57 million units, respectively, due to the recent significant pullback in mortgage rates. The projection of a home sales decline in 2023 is due largely to the expected economic slowdown, affordability constraints and the fact that most mortgage holders continue to have rates substantially below current market rates, creating a strong disincentive to move.
In 2024, we expect home sales to rebound 14.7 percent to 5.24 million as economic growth resumes and mortgage rates stabilize following an expected compression of the currently abnormally high spread between the 10-year Treasury and the 30-year mortgage rates.
The multifamily market is also seeing the effects of the potential recession. We’ve revised downward our estimates of transaction volumes, construction levels, and rent growth in the second half of 2022. Of course, we have not seen a change in overall demographic trends, and we expect those forces to reassert themselves in 2024 or so, as the housing market is still significantly undersupplied.
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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Sarah Wheeler at [email protected]