Lions, and tigers, and inflation, oh my! The latest commentary on the state of the market for October has been released by Fannie Mae’s [1] Economic and Strategic Research Group [2] (ESR) which found that due to inflation, monetary policy tightening by the Federal reserve and a slowing market will tip the economy into a “modest recession” during the first quarter of 2023.
Overall, the ESR expects real GDP growth of 2.3% on an annualized basis this quarter, before contracting by an estimated 0.7% in the fourth quarter as the activity wanes.
“Headline GDP growth is expected to remain negative through the third quarter of 2023 as the economy enters a modest recession,” the ESR said in commentary. “The ESR Group forecasts negative 0.1% real GDP growth on a full-year basis for 2022, a slight downward revision from its prior month prediction of 0.0%, and it maintained its expectation for a 0.5% contraction in real GDP in 2023.”
On the topic of inflation which remains “considerably higher than the Federal Reserve’s target,” the ESR is predicting a 75-basis-point increase in the nominal interest rate at the November meeting of the Federal Open Market Committee.
Due largely to the higher mortgage rate environment, the ESR Group lowered its forecast for total single-family home sales in 2022 and 2023 to 5.64 million and 4.47 million, respectively, which would represent annual declines of 18.1% and 20.8%, respectively.
In addition, the ESR revised its outlook for national home price growth now predicting that year-over-year home price growth will turn negative by the second quarter of 2023.
From a full-year perspective, the ESR Group expects Q4/Q4 national home price growth in 2022 to be 9.0%, down from last month's prediction of 16.0%. The ESR Group expects home price declines of 1.5% in 2023, down from its previous prediction of home price growth of 4.4% in 2023.
"Over the last few weeks, markets have increasingly—and perhaps reluctantly—reflected the resolve of the Fed to lower inflation via rapid tightening of monetary policy," said Doug Duncan [3], Fannie Mae Senior Vice President and Chief Economist. "At times, the market has reacted to incoming economic data suggesting the Fed is making progress in its fight with inflation by anticipating a potential policy 'pivot' toward a less restrictive regimen, prompting the Fed to restate its resolve.”
“Of course, the slowing effect on the housing market of the higher mortgage rate environment has been largely predictable, and home prices appear to have already begun trending downward. Looking ahead to the full year 2023, on a national basis, we expect an average home price decline of 1.5%. Given the ongoing tension between potential homebuyers and home-sellers at the moment, we believe the pace of sales is likely to slow even further, too."