Fannie Mae’s Economic and Strategic Research Group Updates Its 2023 Outlook

Fannie Mae’s Economic and Strategic Research (ESR) group reported on Tuesday (2-21-23) that, due to economic headwinds from unsustainably high consumer spending relative to income, significant declines in monetary aggregates, an increasingly inverted yield curve, and stickier-than-expected inflationary pressures, the ESR Group continues to expect the economy to fall into a modest recession. The Group now believes the likely start date will be in 2023Q2.

In regard to housing, the ESR Group reports that 2023 started on a relative high note given a roughly 100 basis point pullback on mortgage rates since November; although the Group expects this, too, to likely prove to be temporary. In addition, the Group notes that ongoing affordability constraints, the “lock-in” effect creating a financial disincentive for the majority of current homeowners with mortgages to move, and still-tight inventories are expected to continue to limit home sales. Additionally, the 10-year Treasury has increased meaningfully in recent weeks, suggesting that mortgage rates are likely to begin rising again. The ESR Group expects housing starts activity to soften as well, as there remains an elevated number of new homes for sale that are already under construction or completed; these projects will likely be prioritized by builders, rather than breaking ground on new ones.

Adding additional background and his analysis, Fannie Mae’s Senior Vice President and Chief Economist Dr. Doug G. Duncan said:

“Recent data have been stronger than expected in ways that we believe are likely to lead to tighter monetary policy with attendant increases in interest rates. While some optimism appears to have crept into the housing sector, it represents an increase from very low levels of activity and is at risk of declining again if rates reverse. Right now, it’s difficult to ascertain whether COVID-induced consumer behavior changes and business practices are altering seasonal data adjustments, or if the real underlying economic activity is as strong as some recent economic indicators suggest. While we now believe the expected economic downturn will not start until the second quarter of 2023, we still think a mild recession is in the cards.”