According to the most recent monthly commentary from Fannie Mae’s Economic and Strategic Group, they are maintaining their prediction of recessionary conditions in the latter part of 2023.
Nevertheless, Fannie Mae’s outlooks are being complicated by atypical market conditions, particularly the unsustainably high consumer spending relative to average incomes and the historical tendency for a recession to follow a tightening of monetary policy.
Nonetheless, the usual channels through which monetary policy slows down the economy may face disruptions due to other economic factors. For instance, there is an increase in auto sales, and new home builders are expressing greater confidence in the overall state of the economy.
The sales of previously owned homes have remained in line with the forecasts made by the ESR (Economic and Strategic Research) group, which predicted a gradual decline by the end of the year due to affordability limitations and a scarcity of existing homes available for purchase. This situation is partly influenced by the “lock-in effect,” where current homeowners are discouraged from selling their homes because their existing mortgage rates are significantly lower than the prevailing market rates. Consequently, the demand for housing has shifted towards the new home market, boosting builder confidence and the ESR Group’s forecast for single-family home construction starts.
However, concerning multifamily properties, the ESR Group maintains its expectation of a substantial slowdown in construction starts later this year. This slowdown is anticipated due to tighter credit conditions, slower growth in rental prices, and higher vacancy rates.
According to Doug Duncan, the Senior Vice President and Chief Economist at Fannie Mae, there is some data available that supports various alternative perspectives on the economic trajectory. However, Fannie Mae maintains its stance that a moderate recession will begin in the second half of 2023. Duncan emphasizes that the housing sector serves as a key factor in their expectation of a modest recession. Housing performance has consistently surpassed their initial projections, and they anticipate that its relative strength will act as a catalyst for economic expansion in 2024. Despite the Federal Reserve’s efforts to reduce inflation, it has proven to be resilient. Fannie Mae perceives the risks to their baseline forecast as leaning towards further tightening rather than easing, although they acknowledge that the Federal Reserve is currently adopting a wait-and-see approach.