Fannie Mae sees tightening ahead but leaves housing forecast unchanged

Mixed messages coming out of recent data is making the near-term outlook for the housing market and overall economy difficult to predict, but a recession is still in the cards, according to Fannie Mae.

Elevated interest rates are also likely to remain in the picture for some time, researchers from the government-sponsored enterprise said. Still, despite little chance of mortgage-rate relief this year, Fannie Mae left its home sales forecast unchanged from what it predicted in May.

While inflation slowed in May to 4% on an annual basis, contributing to a unanimous decision from Federal Reserve officials to pause central bank rate hikes, stronger-than-expected jobs numbers provided evidence of a still-robust economy. At the same time, core inflation numbers, which exclude food and energy, failed to slow to the same degree as the overall Consumer Price Index, showing noise behind the headline data.

"Core inflation remains sticky, having not fallen as rapidly as other price measures, creating upside risk to the fed funds rate as noted in the Federal Reserve's Summary of Economic Projections, and making it likely in our view that it maintains a restrictive posture for longer than most market participants initially anticipated," said Fannie Mae Chief Economist Doug Duncan in a press release. 

Any resumption of economic tightening from the central bank would mean interest rates would likely stay near or above current marks. Many housing researchers were already predicting average rates would not fall below 6% until at least next year, with the Mortgage Bankers Association a notable exception. By comparison, average interest rates began 2022 near the 3% mark.

Recent comments from central bank officials, including Fed Chair Jerome Powell himself, also suggest the current pause is likely a brief interlude before the resumption of rate increases later this year. Many in the housing industry hoped that a pause would be a forerunner to a pullback.  

But Fannie Mae said it did not expect the Fed to ease monetary policy until inflationary pressures from the labor market pass.

Even with interest rates still higher than many prefer, Fannie Mae left its forecasted home-sales numbers largely unchanged from earlier in the spring. Sales in 2023 and 2024 are expected to total 4.86 million and 4.97 million units respectively, although predictions were made before the recent housing starts report showed numbers coming in far higher than estimated.  

But while sales will remain steady, Fannie Mae revised the forecast for single-family purchase originations downward after its data pointed to a growing share of sales coming in with all-cash offers. Purchase volume is expected to decrease to $1.32 trillion compared to its May prediction of $1.36 trillion. For 2024, purchase origination estimates fell to $1.41 trillion from $1.47 trillion. 

Refinances will also fall further. Fannie Mae revised projected volumes downward to $270 billion in 2023 compared to $292 billion a month ago, and to approximately $493 billion next year from May's estimate of $560 billion.

The steadiness of home-sales activity should occur even as data shows signs that prices may be back on the upswing. Low inventory, thanks to what has been called the lock-in effect, helped create a sluggish housing market, applying upward pressure on prices. No sign of improvement appeared in the spring, a season when more homes tend to be put on the market.

"Housing prices continue to show stronger growth than what was previously expected given the suddenness and significant magnitude of mortgage rate increases," Duncan said.

"Housing's performance is a testimony to the strength of demographic-related demand in the face of baby boomers aging in place and Gen-Xers locking in historically low rates, both of which have helped keep housing supply at historically low levels."

Largely due to the lock-in effect, a surge of interest in new single-family properties is taking place this year, according to another report from Freddie Mac, Fannie Mae's GSE counterpart. Through April, existing-home sales showed a 14% annual decline while purchases of new constructions grew 2%. The increase gave the new-home market its largest share relative to total sales for the January-to-April time frame since 2008, excluding pandemic-impacted 2020, Freddie Mac said. 

Freddie Mac's researchers struck a more cautious tone in its home-price outlook, saying it was "still too early to separate the signal from the noise fully." The GSE predicted home prices to fall 2.9% year over year by the end of the first quarter 2024, and another 1.3% in the following 12 months.

Meanwhile, the threat of economic contraction still lurks, but with a range of signals coming in from economic data, opinions range regarding its arrival and severity. Since it first forecasted a 2023 recession over a year ago, Fannie Mae has moved out the anticipated onset on multiple occasions. In its latest report, it said it still expects economic tightening to bring about a modest recession, now likely to begin in the fourth quarter.

In a departure from its previous forecast, Fannie Mae said gross domestic product in the U.S. will increase by 0.1% annually in the fourth quarter. But it also downgraded its expected 2024 degree of growth, leading to its recession prediction.

While others similarly see a recession on the horizon, including the Mortgage Bankers Association, a growing number of economists think the U.S. may manage to avoid one, given the rate of consumer spending.

The strength of the U.S. consumer similarly played a part in Freddie Mae's outlook for no recession this year, although it did expect unemployment to move higher. 

In the event of a downturn, though, housing could be a bright spot, in part due to the demand for homebuilding, but it would take some time for supply to meet demand, according to the Fannie Mae chief economist.

"We do expect housing will be supportive of the overall economy as it exits the modest recession," Duncan said.