Fannie Mae’s Economic and Strategic Research Group Releases Latest Commentary

According to Fannie Mae’s Economic and Strategic Research (ESR) Group’s latest commentary, which was released on Friday (5-19-23), the ESR is expecting the economy to enter a modest recession in the second half of the year. The ESR notes that unusual dynamics in the current economic cycle continue to complicate forecasting the exact time.

The ESR Group notes that fundamentally, consumer spending remains unsustainably high compared to income and that recession is the typical conclusion to monetary policy tightening program. However, the Group says the usual channels through which monetary policy helps slow the economy may be disrupted, as evidenced by increases in new auto sales resulting from improving supply conditions and a more upbeat outlook from homebuilders. Nevertheless, the Group believes a modest recession is the likeliest of outcomes—and that its timing remains the principal outstanding question.

In regard to housing, existing home sales have been largely in line with the ESR Group’s recent forecasts for further gradual declines throughout the year due to affordability constraints and an extraordinarily tight inventory of existing homes for sale. This is partially a result of the so-called “lock-in effect,” in which existing homeowners are disincentivized from listing their homes for sale because their existing mortgage rate is well below current market rates. As such, housing demand has shifted further toward the new home market, bolstering builder optimism and the Group’s single-family starts forecast. However, on the multifamily side, the ESR Group continues to expect a significant slowdown in starts later this year resulting from tightening credit conditions, slower rent growth, and higher vacancy rates.