Fannie Mae ESR Group: housing market resilience shaping expectations for a modest recession.

Due primarily to an upward revision in recent consumer spending data, Fannie Mae’s Economic and Strategic Research (ESR) Group maintains its belief that economic momentum is running out of steam, according to the ESR Group’s latest monthly commentary. While the acute panic following the bank failures in March appears to have subsided, importantly, the banking turmoil occurred during an already-tightening credit cycle, and the ESR Group believes the additional, incremental tightening in credit conditions owing to the financial fallout will contribute to a modest recession beginning in the second half of 2023. As noted in last month’s commentary, the tightening of financial conditions derived from the bank failures in many ways had the same effect that additional fed fund rate hikes would have had. As such, the ESR Group now expects the re-introduction of monetary easing closer to year-end. While housing demand and home prices have proved more resilient than previously anticipated, the ESR Group expects sales activity to remain subdued because of the persistently low inventory of homes for sale – particularly among existing homes. According to the ESR Group, this is due in large part to the “lock-in effect," in which existing homeowners are disincentivized from listing their homes and potentially giving up their lower mortgage rate. Still, strong demand for housing remains supportive of home prices; although the ESR Group notes significant regional variation in actual and expected home price movements. “The economic slowdown has resumed – whether the end result is a modest recession or simply a soft landing remains unanswered – although we continue to expect the former, as we have since April of last year, when we first made our 2023 recession call,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. “The greater-than-expected resilience of the housing sector to the affordability pressures of higher home prices and mortgages rates is central to our expectation that the recession will be modest. In our view, while it would be premature to expect no further difficulties in the banking sector other than credit tightening, we’re maintaining our baseline expectation of a modest recession, as we see signs of a weakening employment market, slowing retail sales, and declining manufacturing activity. However, the rapid response of hopeful homeowners to periodic declines in mortgage rates, even from the currently higher rates, gives us additional confidence in our use of the word ‘modest.’”

Source: Fannie Mae