Amidst waning inflation and indications of a relaxing labor market, economists are grappling with a pivotal query: Is the economy poised for a gentle descent or a soft recession? The Economic and Strategic Research Group of Fannie Mae contends that while present economic indicators offer mixed signals, a minor contraction appears to be on the horizon. They attributed this to expenditure overshadowing earnings, and the gradual impact of earlier monetary policy interventions.
Notably, a significant discrepancy has emerged between the gross domestic product (GDP) and gross domestic income (GDI) over the previous three quarters. This disparity heightens the possibility of the ESR Group's GDP projection for 2023—recently raised by 0.3% to a Year Over Year basis of 2.2% — falling below current expectations. The ESR Group further highlights that the robust consumption growth experienced in July may be a fleeting occurrence, largely influenced by transient factors. Credit card data and specific retail sales metrics predict that real consumption growth will likely diminish in August.
Challenges loom large for the housing sector as mortgage rates surge beyond the 7% mark. However, the ESR Group believes the adverse impact on overall home sales will be minimal. The emphasis on purchases due to life events rather than optional considerations, coupled with a high proportion of cash-based purchases, is expected to act as a buffer. Despite the robust performance of new home sales in the initial half of this year, a mild decline is anticipated, primarily due to the upward trajectory of mortgage rates and dwindling confidence among homebuilders.
Recent weeks have seen new listings display relative seasonal strength, yet they are still 9.3% lower than the same period last year, according to Redfin. Listings are selling a bit more slowly with a median of 46 days on the market in August, up from 41 days the previous year, as per Realtor.com. However, this is faster than the 59 days noted in Aug. 2019, before the pandemic.
"In April 2022 we noted our expectation that the combination of dissipating stimulus impact and tightening monetary policy would result in a mild recession in the second half of 2023; mild in part because we expected the housing supply shortage to keep production from falling significantly," Fannie Mae's Senior Vice President and Chief Economist Douglas Duncan said. "Housing production has indeed held up. However, the pandemic-related fiscal transfers and built-up household savings have supported consumer spending longer than we had expected, providing unforeseen support to the macroeconomy. Our current prediction for a mild downturn in the first half of 2024 is predicated on the belief that consumers will begin pausing their spending, in part due to the exhaustion of those funds and having to realign to a more sustainable relationship between spending and incomes."
Its forecast for purchase mortgage originations has been lowered due to reduced home sales predictions. Purchase volumes are now anticipated to be $1.3 trillion in 2023, down $30 billion from the previous month's estimate, but expected to rise to $1.4 trillion in 2024, reflecting a $29 billion decrease from earlier forecasts. Due to projected higher mortgage rates, refinance predictions have been cut to $251 billion for 2023 (a $10 billion reduction) and to $442 billion for 2024 (down by $14 billion).
Duncan added that households are confident about personal job security, but the vast majority don't believe it's a good time to buy a home, as mortgage rates and home prices continue to constrain affordability.
The ESR Group anticipates the housing market to remain subdued well into 2024, as the Federal Reserve remains unwavering on interest rates amidst inflationary concerns.
