Persistent inflation, rising interest rates and a slowdown of global economic growth are the primary contributing factors to updated expectations that full-year 2022 real GDP will grow at the reduced rate of 1.3%, 0.8 percentage points less than previously predicted, according to the May 2022 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
The ESR Group’s latest forecast sees second quarter 2022 growth rebounding to 1.6% following last month’s news that the economy contracted by 1.4% in the first quarter. The ESR Group continues to believe that the Fed’s efforts to curtail inflation by tightening monetary policy are unlikely to result in a so-called “soft landing.” Expectations for a modest recession beginning in the second half of 2023 remain unchanged, though the risk of such a contraction occurring sooner have increased as consumer spending power is increasingly constrained by elevated inflation and a rapidly rising rate environment.
“Financial conditions have tightened significantly, and the economy is slowing faster than previously expected as markets adjust to the Federal Reserve’s tightening guidance,” says Doug Duncan, Fannie Mae’s senior vice president and chief economist. “Uncertainty continues to weigh heavily on markets, with geopolitical risks rising as the Russian war on Ukraine extends into its third month. The impact to prices of expected reductions in agricultural production, as well as continued increases in house prices, suggest to us a difficult path for the Fed to return inflation to its two-percent target rate in a timely manner – and, of course, in the absence of an economic downturn.”
The ESR Group also expects a meaningful slowdown in home sales for the second and third quarters of 2022, followed by a softening in construction activity and, ultimately, a large deceleration in home price growth. With mortgage rates having risen faster in the last 5 months than in any period since 1981, the ESR Group expects both purchase and refinance originations to decline meaningfully. With only 1.4% of mortgages now predicted to have a 50-plus-basis point incentive to refinance, it’s expected that, going forward, a majority share of refinance activity will be of the cash-out variety.
“Rising mortgage rates are reducing affordability through higher mortgage-related costs, all while house prices continue to grow,” Duncan adds. “Historically, rapid and substantial rises in mortgage rates have had the effect of slowing activity, which we reflect in our forecast. Not only is the worsening affordability of homes a problem for potential entry-level homebuyers, but current homeowners are less likely to trade in their existing lower-rate mortgages and list their homes for sale, both of which will likely weigh on sales.”
