Fannie Mae: ‘Modest’ recession coming in Q2 2023.

Despite ending the year stronger than anticipated, the U.S. economy is still expected to slip into a modest recession in the first half of 2023, Fannie Mae’s Economic and Strategic Research (ESR) Group said recently. According to the ESR Group’s January 2023 commentary, the group forecasts that an eventual “retrenchment of the consumer” will be a major factor in the coming “economic contraction.” The group predicts that fourth-quarter gross domestic product (GDP) growth for 2023 will be -0.6%, one-tenth lower than its previous forecast. “Noting cooling inflationary pressure in the past three Consumer Price Index (CPI) reports, the ESR Group believes the Federal Reserve is likely nearing its eventual terminal (interest) rate, but notes that upside risk remains for tighter-for-longer monetary policy should a recession be delayed or avoided altogether, or, alternatively, if inflation measures fail to further cool.” In addition, the ESR Group said it expects a cumulative 6.7% decline in home prices over the next two years, as housing affordability remains unsustainably stretched. “A repeat of the Great Financial Crisis is not expected, however, as far fewer borrowers are facing interest rate shocks; loan workout and modification programs are more robust; and aggregate residential real estate and the broader financial system are substantially less leveraged compared to the 2006-08 period,” the ESR Group said. The group also said it expects sales of existing homes to remain constrained, due to the ongoing affordability challenges and the “lock-in effect” —- in which many current homeowners have mortgages with lower rates than are currently available — creating a path for the new home sales to outperform existing home sales in coming years. “There are economic signals pointing to recession, but also signs that a ‘soft landing’ may be in the offing,” said Doug Duncan, Fannie Mae’s senior vice president and chief economist. “In our view, the balance still suggests a modest recession, particularly if the Federal Reserve maintains its focus on labor market tightness.”

Source: National Mortgage Professional