Fannie Mae forecast foresees lean times for lenders

Fannie Mae is pushing its expectation for a possible recession further out again, noting the housing market won't improve regardless of the economy's ebbs and flows.

The government-sponsored enterprise's Economic and Strategic Research Group is predicting that a mild recession would be most likely to happen in the first half of 2024, extending its most recent forecast by another quarter. The prediction stems from recent stronger inflation metrics, although the group said monetary policy effects have yet to be fully realized. 

If a recession occurs, homebuyers would see both lower interest rates but tighter credit standards, the ESR said. In the case of the alternative "soft landing" scenario, low inventory and the mortgage rate "lock-in effect" would strain the market. 

"The difference between those two alternative outcomes is not expected to make much difference to home sales," said Doug Duncan, senior vice president and chief economist at the GSE, in a press release Wednesday. "The risk to housing activity is that inflation has bottomed out and begins to reaccelerate, requiring additional tightening from the Fed."

Mortgage rates remain above 7% a month after the Federal Reserve's latest rate upgrade, while experts are anticipating the Fed to pause hikes next month. Affordability and inventory meanwhile remain severely strained.

Fannie Mae's prediction of $1.3 trillion in purchase origination volume this year was unchanged, while it slightly upgraded its 2024 forecast to $1.5 trillion in purchase mortgage origination volume.

Those volumes coincide with the Mortgage Bankers Association's latest Mortgage Finance Forecast, putting 2023 and 2024 purchase volume at $1.37 billion and $1.51 billion, respectively. 

The GSE is more bearish on refinances, projecting volume at $261 billion this year and $456 billion next year, representing slight downgrades. The MBA in comparison is anticipating $333 billion in refis this year and $531 billion at the end of 2024. 

The ESR's "soft landing" scenario would only occur if economic growth slows and the unemployment rate rises, muting wage growth in a careful balance with the Fed's 2% inflation target. The GSE is also updating its fourth quarter gross domestic product growth projection from 1.1% to 1.9% year-over-year growth. 

Today's pace of homebuying activity, which the MBA yesterday pegged at an 28-year low, is being supported by less rate-sensitive buyers in the form of higher-than-normal cash purchases, the GSE said. 

The industry saw positive momentum last month in construction with single-family starts rising 6.7% in July, to an annualized pace of 983,000 units. Fannie Mae is anticipating some pullback with sky-high mortgage rates, but is expecting 1 million annualized units in coming quarters as inventory continues to be strained. Homebuilders are also offering more concessions to promote activity. 

"Since October, a mortgage rate of around 7 percent seems to be a psychological barrier where many buyers begin to retrench," the ESR group wrote in an August commentary. "As such, the short-term outlook for single-family home construction likely depends on whether a 7 percent plus mortgage rate is sustained."