The unemployment rate will move modestly higher, enough to slow the economy but not trigger a full-blown recession, as inflation cools but mortgage rates remain above 6% through the end of the year.
That’s what Freddie Mac sees in its crystal ball for the rest of the year, according to its June U.S. Economic, Housing, and Mortgage Market Outlook, published last week.
According to the outlook report, resilient consumer spending has helped stave off a recession.
“The U.S. economy, which primarily hinges on consumer spending, will slow down once consumers’ buffer of savings are depleted,” the report states. “But its impact on the economy will be limited unless it is accompanied by a substantial negative economic shock.”
The report notes that, in the past year and a half, the U.S. economy has weathered “adverse shocks” — including war and major banking failures — and avoided slipping into recession. “Part of the reason for the resilience of the economy is the resilience of the U.S. consumers, who still have substantial savings to draw on and can bolster the economy despite a decline in employment.”
Under Freddie Mac’s baseline scenario, the unemployment rate will gradually move higher. Earlier this month, the Labor Department reported that the unemployment rate rose in May by 3 basis points to 3.7%. The rate has ranged between 3.4% and 3.7% since March 2022, and remains near a 50-year low.
Rising unemployment will slow the economy, Freddie Mac said. While a recession will likely be avoided, inflation will cool but remain above the Federal Reserve’s target of 2%, it said. As a result, mortgage rates will “move mostly sideways, most likely remaining above 6% through year-end,” the report states.
Other highlights
- Home sales: Freddie Mac’s housing outlook remains muted “due to the challenges presented by higher mortgage rates and a slowing economy.” However, it said, not all the trends in the housing market are unfavorable. “Despite the substantial affordability challenges, first-time homebuyers continue to come to the market and have contributed to an increase in homeownership rates.”
- Home prices: While home prices have been positive in most markets, Freddie Mac said it’s “still too early to separate the signal from the noise fully, and employment is likely to weaken, so we maintain a cautious outlook for prices.” It’s official corporate forecast calls for house prices to fall 2.9% over 12 months through the first quarter of 2024, and an additional 1.3% over the subsequent 12 months.
- Mortgage originations: Freddie Mac says the refinance market will remain muted through the end of this year, due to the expected path for mortgage rates. “On the home purchase side, we expect mortgage originations to stay flat this year,” it said. It added that purchase originations will start to strengthen later this year as home sales stabilize, and will resume modest growth in 2024.
