Home prices to decline in 2023, recession ahead: Fannie Mae forecast
In Fannie Mae's latest economic forecast, it confirmed its belief that the housing market will tip the U.S. into a recession in early 2023. The forecast also said that home prices could fall next year.
The mortgage giant’s Economic and Strategic Research (ESR) Group revised its economic forecast for home prices, saying it expects them to rise just 9% annually in 2022 — down from its previous forecast of 16% annually. The group also forecasted that in 2023, home prices will fall by an average 1.5%, down from its previous forecast of 4.4% growth.
Additionally, Fannie Mae increased its gross domestic product (GDP) forecast significantly for the third quarter of 2022, moving it to 2.3% annualized growth. This is up from its previous economic growth prediction of 1.3%, according to the group’s October 2022 commentary. But in the fourth quarter, the economy is forecasted to contract by 0.7% instead of growing 0.7% as was previously predicted. GDP will then remain negative through the third quarter of next year as the economy dips into a recession, Fannie Mae said.
"Given sluggish consumer spending, the ongoing tightening of monetary policy and additional signs of weakness in global economic and financial conditions, we continue to expect a moderate contraction will occur in 2023, with the unemployment rate ending 2023 over 5%," Fannie Mae stated in its forecast.
The group forecasted that total GDP for 2022 will contract 0.1%, and will contract 0.5% in 2023.
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INFLATION TO REMAIN HIGH THROUGH 2024, RECESSION ON ITS WAY: MBA FORECAST
Fannie Mae predicts a modest recession next year
While Fannie Mae forecasted that a recession is on the horizon, the company also said it will likely be mild.
"We continue to expect the forecasted recession to be modest based in part on the relatively limited degree of labor market slack that we believe is necessary to alleviate above-target inflationary pressure; once achieved, we expect monetary policy will likely ease and the economy will return to growth," Fannie Mae said in its economic outlook.
The Mortgage Bankers Association (MBA) also recently released its economic forecast, predicting a likely mild recession next year as well. And as the U.S. enters a recession, the Federal Reserve is likely to ease its interest rate hikes, MBA Chief Economist and Senior Vice President Mike Fratantoni said.
But while economists expect the economic downturn to be mild, there is still a risk that the recession could grow into a larger financial crisis, Fannie Mae said.
"It should be noted, however, that historically in periods of rising interest rates and dollar exchange rate appreciation, there has been a tendency for financial crises to occur within the global economy," Fannie Mae stated. "Given the speed at which interest rates have risen, we believe there is growing risk of such an event occurring over the coming quarters, which could lead to a deeper or more prolonged contraction than our base forecast expects."
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FED SAYS INFLATION CONCERNS REMAIN, WILL CONTINUE RAISING RATES
Federal Reserve likely to continue raising rates
At its September meeting, the Federal Open Market Committee (FOMC) raised the federal funds rate by 75 basis points in order to combat high inflation. This marked the third consecutive 0.75 percentage point increase and the fifth rate hike this year.
The Fed also released the minutes from that meeting, which showed that it plans to continue raising interest rates in the months ahead. However, it said it may need to slow the pace of interest rate hikes as the economy slows.
"Based on recent comments from Fed officials, we do not expect the Fed to slow its pace of policy tightening until there is clear evidence of both a loosening labor market as well as decelerating core inflation measures," Fannie Mae said in its forecast.
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