The combination of high inflation, monetary policy tightening and a slowing housing market is still projected to tip the economy into a modest recession in the first quarter of 2023, according to October 2022 commentary from Fannie Mae‘s Economic and Strategic Research (ESR) Group.
The ESR Group expects real gross domestic product (GDP) to grow 2.3% annualized in the third quarter of 2022 due to strong net export and inventory investment activity, before contracting 0.7% annualized in the fourth quarter as the effects of that activity wane.
Headline GDP growth is expected to remain negative through the third quarter of 2023 as the economy enters a modest recession. The ESR Group forecasts negative 0.1% real GDP growth on a full-year basis for 2022, a slight downward revision from its prior month prediction of 0.0%, and it maintained its expectation for a 0.5% contraction in real GDP in 2023. Core inflation remains considerably higher than the Federal Reserve’s stated target; and despite the historic decline in August job openings, the continued strength in labor has futures markets expecting the Federal Open Market Committee (FOMC) to raise the federal funds rate by an additional 75 basis points at its November meeting.
Due largely to the higher mortgage rate environment, the ESR Group lowered its forecast for total single-family home sales in 2022 and 2023 to 5.64 million and 4.47 million, respectively, which would represent annual declines of 18.1% and 20.8%. While multifamily construction remains strong, the ESR Group also revised downward its multifamily starts forecast for 2023 to 390,000 units. Further, the ESR Group significantly revised its outlook for national home price growth and now expects year-over-year home price growth to turn negative in Q2 2023. From a full-year perspective, the ESR Group expects Q4/Q4 national home price growth in 2022 to be 9.0%, down from last month’s prediction of 16.0%. The ESR Group expects home price declines of 1.5% in 2023, down from its previous prediction of home price growth of 4.4% in 2023.
“Over the last few weeks, markets have increasingly – and perhaps reluctantly – reflected the resolve of the Fed to lower inflation via rapid tightening of monetary policy,” comments Doug Duncan, Fannie Mae’s senior vice president and chief economist. “At times, the market has reacted to incoming economic data suggesting the Fed is making progress in its fight with inflation by anticipating a potential policy ‘pivot’ toward a less restrictive regimen, prompting the Fed to restate its resolve.”
“Of course, the slowing effect on the housing market of the higher mortgage rate environment has been largely predictable, and home prices appear to have already begun trending downward,” adds Duncan. “Looking ahead to the full year 2023, on a national basis, we expect an average home price decline of 1.5 percent. Given the ongoing tension between potential homebuyers and home-sellers at the moment, we believe the pace of sales is likely to slow even further, too.”
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