“The economic slowdown has resumed – whether the end result is a modest recession or simply a soft landing remains unanswered – although we continue to expect the former, as we have since April of last year, when we first made our 2023 recession call,” Doug Duncan, senior vice president and chief economist at Fannie Mae, said.
“The greater-than-expected resilience of the housing sector to the affordability pressures of higher home prices and mortgage rates is central to our expectation that the recession will be modest,” he added.
However, the ongoing lack of existing homes for sale will continue to support demand for new homes, the group noted.
New home construction is expected to pull back later in 2023 – consistent with Fannie Mae’s forecasted recession – which is due, at least in part, to tighter credit availability for construction lending. Still, Fannie Mae expects new home sales to hold up comparatively well relative to existing homes.
“Homebuilders continue to show a willingness to offer rate buy-downs and other incentives to move their inventories. The past year’s pullback in the price of lumber and other materials also helps builders to maintain margins even with discounting, and we would expect them to continue to do so,” Fannie Mae’s ESR group said.
No additional bank failures have occurred since mid-March, and high frequency data from the Federal Reserve show that aggregate banking deposits have stabilized in the most recent weeks. This includes deposits at small banks, which were roughly flat — and even rose somewhat over the past two weeks.
Still, the prior bank failures and ongoing fallout took place during a period in which credit conditions were already tightening, so any additional marginal tightening may end up contributing to an eventual expected recession, the group explained.
Fannie Mae noted the continued pullback in longer-term interest rates relative to pre-banking turmoil, combined with a lack of accelerating inflation expectations, suggests that financial markets still anticipate that the recent banking crisis will be a drag — at least modestly — on economic activity.
With upgrades to both home sales and home price forecasts, Fannie Mae adjusted its forecast for mortgage origination upward. Total originations for 2023 are now expected to post $1.66 trillion, up compared to its previous forecast of $1.55 trillion. For 2024, Fannie Mae anticipates volumes of $2.02 trillion, an increase from its prior forecast of $1.89 trillion.
House prices, measured by Fannie Mae’s home price index, are projected to decline by 1.2% in 2023 on a Q4/Q4 basis from a previously expected 4.2% decline. In 2024, home prices will decline by a further drop of 2.2% compared to previous expectations.
Source: housingwire.com