According to the July 2023 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group, although recent data on inflation has provided reason for optimism, less favorable base effects are likely to slow further progress in reducing annual inflation to the preferred 2% rate.
Given the low rate of productivity gains, wage growth appears to remain too high for inflation to reach its target anytime soon, so the ESR Group is forecasting another rate hike later this month and even tighter monetary policy through the end of the year.
Following an unusually large upward revision to first quarter 2023 gross domestic product, this month the ESR Group upgraded its expectations for economic growth in 2023 by a full percentage point to 1.1%. However, while noting that the probability of a “soft landing” may have increased of late, the ESR Group continues to expect a modest recession beginning in the fourth quarter of 2023 or the first quarter of 2024.
An extremely limited number of existing homes available for sale continues to be the defining feature of today’s housing market, notes the ESR Group. While total home sales remain near the lowest annual level since 2009, this is not due to lack of demand. Rather the ongoing lack of inventory, the extent of which exceeded the ESR Group’s earlier expectations, has resulted in significantly stronger home price appreciation than previously anticipated.
Dynamics in the existing sales market have been highly supportive of new construction, though, and the ESR Group has significantly upgraded its single-family starts forecast. Still, given the ESR Group’s expectation of slowing economic activity through the end of the year and into 2024, it continues to anticipate slowing home price growth and a slower pace of starts in 2024.
Expect no relief on mortgage rates says Doug Duncan, senior vice president and chief economist, Fannie Mae: “While spreads have come in a bit recently, they remain well above longer-term levels and that means rates for consumers will likely stay elevated.
“As we noted in our April 2022 forecast, whether there is a mild recession (our base case) or a soft landing, the supply issues in housing will provide a downside cushion for economic activity,” he adds. “That is playing out quite close to forecast on existing homes, but new construction has been even more supportive than we expected.”
Photo by Sarah Trummer.
