The Fannie Mae Economic and Strategic Research (ESR) Group, in its recent October commentary, anticipates that the swift increase in long-term interest rates could potentially hinder forthcoming economic expansion. The group warns of a potential credit event and envisions a ripple effect on consumer spending, business investments, and employment as debt transitions from low to higher interest rates.
Nevertheless, the latest data portrays an economy that's healthier than earlier assessments. After considerable revisions to national account statistics, a brighter picture of real consumption and incomes emerged, leading the ESR Group to upgrade its 2023 real GDP projection from 2.2% to 2.5%. Yet, they still predict a slowdown in economic growth as 2023 draws to a close and 2024 begins.
While the mortgage rate surge has emphasized the potential setbacks in housing activities, home prices have surprisingly shown more resilience. Consequently, the ESR Group has revised its home price prediction for 2023, moving from an increase of 3.9% to an optimistic 6.7%. However, the group does caution about a potential deceleration in home price growth in 2024 due to persisting affordability issues.
"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,’” Fannie Mae Senior Vice President and Chief Economist Doug Duncan said. “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."
Duncan further elaborated that even though inflation rates are gradually decreasing, they expect the "higher for longer" stance by the Federal Reserve until the inflation rate stabilizes at the targeted two percent.
Highlighting the housing market's tumultuous journey, Duncan remarked, “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.”
