The Russian invasion of Ukraine and its implications for the global economy have added increased pressure on inflation and supply-chain difficulties as monetary policy tightening begins, according to the March 2022 commentary by the Fannie Mae Economic and Strategic Research (ESR) Group.
The ESR Group now projects full-year 2022 growth of 2.3% in real gross domestic product (GDP), down from last month's projected 2.8%, but acknowledges that many of the base assumptions in its forecast — including a near-term resolution to the acute global economic effects of the Russian invasion of Ukraine — represent substantial downside risks to both the macroeconomic and housing outlooks.
Before the conflict, inflation, as measured by the Consumer Price Index, hit a 40-year high and the Federal Reserve was poised to begin significant monetary tightening. According to the ESR Group, the central bank's already difficult task of enacting a "soft landing" — raising rates to combat inflation without precipitating economic contraction — has been further complicated by the Ukraine crisis. Despite the substantial uncertainty, the group continues to expect the Federal Reserve to raise the federal funds rate five times in 2022 and eight times total through 2023.
The Fed on Wednesday announced a quarter-point increase in the federal funds rate and said it expects to make six additional rate increases this year.
Many of the same risks are expected to affect housing, the ESR Group said. It increased its 30-year fixed mortgage rate forecast to 3.8% in 2022 and 3.9% in 2023, due to the likely upward impact of Fed monetary-policy tightening outweighing the downward "flight to quality" rate forces on the long-end of the yield curve.
Combined with the lower economic growth forecast, the ESR Group downgraded its housing outlook and now expects total home sales to decline 4.1% in 2022, compared to the 2.4% decline forecasted last month.
"A slowing economy, decades-high inflation, expired fiscal stimulus, tightening monetary policy, and now Russia's invasion of Ukraine are all weighing on the health of the U.S. economy," Doug Duncan, Fannie Mae senior vice president and chief economist, said. "We marked down our growth expectations this month by half a percentage point for 2022, but risks remain firmly to the downside. The interruptions to the trade of energy, agriculture, and other commodities are putting upward pressure on inflation and making an already difficult task for the Federal Reserve even more challenging."
He said housing "is currently acting as support to an otherwise slowing economy, although it is (also) adding significantly to inflation. Even as interest rates are rising and reducing affordability, demographics are still strong supports for demand, and the paucity of existing home supply is supporting new construction and sales. The degree to which monetary ease is capitalized into home values suggests increased risk as rates rise, but this may be offset by some evidence that housing is an intermediate-term hedge against inflation."
Duncan added: "We expect home purchase loan volume to hold up reasonably well, but refinance activity to fall off considerably over our forecast horizon, perhaps totaling only a third of originations, unless there is a drop in mortgage rates, which we do not expect. Nonetheless, from a historical perspective, mortgage rates around 4% for fixed-rate loans is still a consumer-friendly rate for a home purchase."
