As mortgage rates continue to hover above 7%, the housing market is facing “renewed headwinds,” and home sales have hit low levels “not seen since 2011.”
That’s what Fannie Mae economists wrote in their September economic and housing outlook commentary issued this week, which doubled down on their earlier prediction that the economy is headed toward a “mild recession” next year.
“The new home market, which showed surprising strength over the first half of 2023, due in part to a limited inventory of existing homes for sale, may now be taking a breather,” the commentary states.
Fannie Mae economists wrote they’re maintaining their earlier forecast for a “modest economic contraction” in the first half of 2024. As the Federal Reserve continues its battle to tamp down inflation while also steering the economy toward a “soft landing,” the economists said they believe “personal consumption (spending) remains at what we believe to be an unsustainable level relative to incomes, and the full effects of monetary policy tightening are still working through the economy.”
Fannie Mae economists are forecasting the top line and core measures of the Consumer Price Index to end 2023 around 3.1% and 4%, respectively, before slowing further next year to 2.4% and 2.5%.
As for home sales, the economists are forecasting the U.S total to rest at 4.8 million in 2023, “which would be the slowest annual pace since 2011.” In 2024, those sales will pick up only slightly, they predict, to 4.9 million. They also downgraded their expectations for 2023 mortgage originations from $1.6 trillion to $1.56 trillion and from $1.92 trillion to $1.88 trillion in 2024.
Still, “mixed signals” from economic data “continue to muddle the near-term outlook,” and the answer to the crucial question whether the economy is on course for a “soft landing or a mild recession.”
“But a modest contraction remains the most likely outcome as consumption continues to outpace incomes and previous monetary policy tightening works its way through the system,” Fannie Mae stated in a news release Monday. Inflation appears to be “decelerating” and there are signs that the labor market is cooling, but there continues to be “significant divergence” between GDP and gross domestic income over the past three quarters, the release states.
Meanwhile, they expect the data to show credit card transactions and retail sales pulled back in August.
Even though the housing market is racing “renewed headwinds” with over 7% mortgage rates, “the downside risk to total home sales is limited as more sales are being driven by life events rather than discretionary factors, and the cash share of purchases remains high,” the news release states.
“New home sales were surprisingly strong in the first half of the year, due partly to homebuilder rate buydowns, which become more expensive when mortgage rates rise,” Fannie Mae’s release stated. “Going forward, (Fannie Mae’s economic team) expects new home sales to pull back slightly due to the higher mortgage rate environment and recent decline in homebuilder confidence.”
“In April 2022, we noted our expectation that the combination of dissipating stimulus impact and tightening monetary policy would result in a mild recession in the second half of 2023; mild in part because we expected the housing supply shortage to keep production from falling significantly,” Doug Duncan, Fannie Mae’s senior vice president and chief economist, said in a prepared statement.
“Housing production has indeed held up. However, the pandemic-related fiscal transfers and built-up household savings have supported consumer spending longer than we had expected, providing unforeseen support to the macroeconomy,” Duncan continued.
“Our current prediction for a mild downturn in the first half of 2024 is predicated on the belief that consumers will begin pausing their spending,” he said, “in part due to the exhaustion of those funds and having to realign to a more sustainable relationship between spending and incomes.”
Meanwhile, households “remain confident in their own employment, even though they don’t feel great about the overall economy,” Duncan said, citing Fannie Mae’s latest National Housing Survey. “The vast majority don’t believe it’s a good time to buy a home, as mortgage rates and home prices continue to constrain affordability.”
“Recession-level home sales volumes resulting from the very low levels of existing homes for sale and the significant affordability challenges” support those survey results, he said.
“The elevated share of new homes relative to total home sales and a similarly elevated share of first-time homebuyers purchasing new homes are additional evidence of the ongoing housing supply problem,” Duncan said. “We expect that total housing market activity will remain at a low level into 2024 as the Federal Reserve continues to hold the line on interest rates against inflation.”