Fannie Mae’s special Economic and Strategic Research Group (ESR) has published their monthly commentary Covering January 2023 and overall believes that the current rate of consumption as unsustainable relative to disposable income and forecasts that an eventual retrenchment of the consumer will be a major factor in the upcoming economic contraction that they are continuing to predict.
Overall, the ESR expects a cumulative 6.7% home price decline over the next two years as housing affordability remains unsustainably stretched. While they predict the upcoming recession will not be near the magnitude of the Great Financial Crisis as far fewer borrowers are facing interest rate shocks, loan workout and modification programs are more robust, and aggregate residential real estate and the broader financial system are substantially less leveraged compared to the 2006-2008 period.
The ESR also said that ongoing affordability challenges and the “lock-in” effect—in which many current homeowners have a financial disincentive to list their homes due to higher mortgage rate environment—results in the ESR predicting that existing home sales activity to remain constrained. In fact, new home sales trend to comparatively outperform existing home sales in coming years.
"There are economic signals pointing to recession but also signs that a 'soft landing' may be in the offing," said Doug Duncan, SVP and Chief Economist for Fannie Mae. "In our view, the balance still suggests a modest recession, particularly if the Federal Reserve maintains its focus on labor market tightness.”
“While limited and tentative signs of a slowing labor market are appearing, overall, labor remains robust. The market sees the Federal Reserve easing in the second half of the year, which can be interpreted either as a view that the recession is forthcoming or that the slowdown in inflation will lead to a less restrictive monetary posture.”
“If the latter occurs, the lower accompanying rates will likely set the stage for a pickup in housing activity going into 2024, as can be seen in our latest forecast,” Duncan concluded. “However, if the market is wrong—and the Federal Reserve does as it has stated it will do and holds the federal funds target at the terminal rate longer to ensure no inflation resurgence—then the accompanying rate decline and associated revival in housing activity will likely be delayed. In either case, we expect 2023 to be a slow year for the housing market."
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