The rapid rise in long-term interest rates over the past few months will likely weigh on future economic growth, according to the October 2023 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
Even barring another acute credit event, which the ESR Group warns is more likely now that rates are moving rapidly again, the turning of the credit cycle is ongoing and, over time, is expected to weigh on consumption, business investment, and hiring as low-interest debt is rolled into higher rates.
Still, the ESR Group notes that the economy likely faces fewer structural headwinds than previously thought after significant updates to the national accounts showed real consumption and incomes in better balance than had been reported previously. When combined with other incoming data, the ESR Group revised upward its 2023 real GDP projection by three-tenths to 2.5% on a Q4/Q4 basis but continues to expect significant slowing in economic growth through the end of the year and into 2024.
“Personal consumption has not only remained resilient, but recent official data revisions indicate that the consumer has been in a better position than previously thought, increasingly the likelihood of an economic ‘soft landing,’” said Doug Duncan, Fannie Mae SVP and Chief Economist. “However, despite consumer resiliency, the recent rise in interest rates has been precipitous, and in past environments – even with less severe interest rate shocks–this has led to economic dislocations. As such, we still expect to see a mild economic downturn in the first half of 2024."
While incoming purchase mortgage application data has highlighted the downside risk to housing activity amid a mortgage rate environment that is now well over 7%, home prices have proven more resilient than expected, causing an upward revision to the ESR Group’s 2023 home price forecast from 3.9% to 6.7% on a Q4/Q4 basis. The ESR Group continues to expect home price growth to decelerate in 2024 as affordability remains extremely constrained.
The ESR Group notes that further declines in home sales from an already low level due to the run-up in mortgage rates will likely be muted relative to the slowdown in 2022, but it still predicts the annualized pace of existing home sales to fall below 4 million units in Q4.
New home sales continue to hold up better than existing sales due to ongoing inventory constraints, though the ESR Group’s forecast calls for a modest deceleration in both new single-family sales and starts in the coming quarters.
"While the rate of inflation has slowed and continues to slow, we continue to take the Federal Reserve at its word that rates will be ‘higher for longer’ until annual inflation stabilizes at the two-percent target; though at this time, in part because of the recent run-up in long-term rates, we do not expect additional Fed rate hikes," said Duncan. “In many ways, the housing market experienced four years of business in a two-year period between mid-2020 and mid-2022. With ongoing affordability constraints and rising mortgage rates, much of that activity has essentially been given back. We expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability into 2024.”
To read the full report, including more data and methodology, click here.