Housing MarketMortgageReal Estate

The uptick in housing activity will be temporary: Fannie Mae

Fannie Mae expects a modest recession starting in Q2 2023

The mortgage industry started 2023 with optimism due to an increase in housing activity. However, the celebrations may have to wait, as the fundamentals point to further weaknesses ahead of an expected recession in the second quarter of this year, according to Fannie Mae

“Recent data have been stronger than expected in ways that we believe are likely to lead to tighter monetary policy with attendant increases in interest rates,” Doug Duncan, Fannie Mae’s senior vice president and chief economist, said in a statement. 

The latest data releases present substantial upside risk to the Economic and Strategic Research (ESR) group’s first quarter GDP forecast, Fannie Mae said in its economic and housing outlook. These include a blowout labor report, manufacturing output growth, and updated Consumer Price Index (CPI) seasonal adjustment factors that showed slower-than-expected disinflation rate.

The agency views a soft landing as unlikely but still possible. Fundamentally, personal consumption remains at an unsustainably high level relative to incomes, pointing to eventual consumer spending retrenchment. And, the labor market is likely too tight to significantly slow inflation in the core services less shelter category — which is the Federal Reserve’s main focus — according to the ESR group. 

While some level of optimism appears to have crept into the housing sector, it represents an increase from very low levels of activity — and is at risk of declining again if rates reverse, Duncan said. 

“Affordability constraints and tight inventories will continue to limit home sales and the 10-year Treasury has moved up meaningfully since the completion of our interest rate forecast, suggesting mortgage rates will soon be back on the rise,” according to the ESR group.

Fannie Mae expects home sales to remain subdued for the remainder of 2023, although recent mortgage application data came in stronger than expected. 

Fannie’s mortgage rate outlook is now lower than its January forecast and home sales in 2023 are expected to be 4.67 million units. While that expectation is up compared to the previous forecast of 4.52 million, it still marks the slowest annual pace of sales since 2011.

Home sales are now expected to make a partial rebound in 2024, however, with total sales increasing by 9.6% to 5.12 million units as the broader economy recovers. Still, this is a pace well below recent years due to ongoing affordability challenges.

In addition, existing homeowners have mortgages with rates that are well below current market rates, which acts as a strong disincentive to move.

“We expect this ‘lock in’ effect to continue as mortgage rates remain in their current range,” the ESR group said. 

The fast decline in home sales that occurred in 2022 is unlikely to be repeated this year, but Fannie Mae expects the pace of existing sales to remain soft, totaling around 4.1 million units for the year – a level similar to the annual pace that occurred in 2008-2011 period.

Fundamentally, there continues to be an elevated number of homes under construction or completed that are for sale relative to the recent sales pace. In turn, Fannie Mae projects homebuilders to slow the pace of new starts in coming months as builders turn to generating sales by working through their current inventories.

“This heightened level of inventory is partly why we expect new home sales to remain resilient relative to existing home sales,” the agency said.

Given that homebuilders will be able to draw from their already started inventories, the ESR group anticipates housing starts to decline relative to the new home sales pace over the next year.

Single family starts for 2023 are expected to be 24% less than 2022 totals, but new single-family sales are forecasted to decline only 5.4% for the next year.

Fannie Mae also revised its originations forecast to be modestly upward due to lower rates. 

The agency now expects 2023 purchase volumes to be $1.3 trillion, up $38 billion from last month. In 2024, purchase mortgage volume is projected to rise to $1.5 trillion as the housing market recovers from the predicted recession. This is an increase of 10% from 2023 and an upgrade of $32 billion from Fannie Mae’s previous forecast. 

Refinance originations are projected to be $367 billion in 2023 and $577 billion in 2024 – representing upward revisions of $12 billion and $32 billion, respectively. 

Overall single-family mortgage originations is expected to be $1.69 trillion in 2023 and $2.03 trillion in 2024, a substantial contraction from Fannie Mae’s estimated volume of $2.36 trillion in 2022. 

The agency slightly revised its 2023 real gross domestic product (GDP) forecast by one-tenth of a point to a decline of 0.5% on a Q4/Q4 basis. Fannie Mae expects GDP growth of 1.8% in 2024, a downward revision of one-tenth. 

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