Fannie Mae’s Economic and Strategic Research Group Down Grades 2022 GDP Expectations

Fannie Mae’s Economic and Strategic Research (ESR) Group on Thursday (2-17-22) released its February 2022 commentary. According to the ESR, with inflation at its highest level in four decades, the Federal Reserve is expected to enact a more aggressive course of monetary policy tightening than previously forecast, with a 50-basis-point increase to the federal funds rate in March now predicted to be the first in a series of interest rate hikes through 2023.

The combination of a less accommodative interest rate environment and an increasingly worker-scarce labor market led the ESR Group to downgrade its expectations for 2022 real GDP growth from 3.1% to 2.8%; however, its expectations for 2023 headline growth remained unchanged at 2.2%, a pace that approaches the long-run trend. Risks to the forecast include uncertainty over the future course of inflation, potential geopolitical developments in Eastern Europe, and currently unforeseen COVID-related disruptions to consumer behavior and the labor market.

In addition to a slowdown in economic activity, the ESR Group expects housing activity to moderate from 2021’s highs. Single-family home sales are expected to decline 2.4 percent in 2022—a slightly steeper drop than the previously anticipated 1.2 percent dip—due to increasing affordability constraints associated with rising mortgage rates. As measured by the FHFA Purchase-Only Index, the ESR Group currently projects home price growth of 7.6 percent in 2022 and 3.3 percent in 2023, down from last year’s record-setting 17.3 percent. With the 30-year fixed mortgage rate now projected to close the year at 3.7 percent, refinance activity, as a share of total single-family mortgage originations, is expected to decline to 36 percent in 2022 from 58 percent in 2021 and could move even lower if rates move further upward.

In a statement prepared for the release of the ESR Groups February commentary, Doug Duncan, Fannie Mae Senior Vice President and Chief Economist said, “Challenges to macroeconomic forecasting have grown not only because of inflation’s largely unexpected persistence but also because of its outsized and broad-based impact on the U.S. economy and global economic growth.”

“For homebuyers, we believe that borrowing costs will likely rise with the increase in mortgage rates, further eroding affordability,” Duncan continued. “At the same time, we expect demographic factors and a shortage of housing supply to be supportive of housing activity. What remains unknown is how higher mortgage rates and tighter monetary policy—through expected interest rate hikes and changes to the makeup of the Fed’s portfolio—will impact home prices.”