Economic downturn could put a damper on a promising start to the spring homebuying season, but set the stage for mortgage rates to ease and for home sales to rebound in 2024.

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The U.S. remains on track to fall into a “modest recession” during the second quarter, which could put a damper on a promising start to the spring homebuying season but set the stage for mortgage rates to ease and for home sales to rebound in 2024, economists at mortgage giant Fannie Mae predict.

Home sales started out the year on a relative high note thanks to mortgage rates retreating from 2022 highs. But rates have since reversed course following a strong Feb. 3  jobs report and last week’s Consumer Price Index readout, which showed inflation cooling only slightly in January.

Doug Duncan

“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,” said Fannie Mae Chief Economist Doug Duncan, in a statement. “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.”

Recession could set stage for mortgage rates to ease

Projected rates for 30-year fixed-rate mortgages. Source: February forecasts by Fannie Mae and the Mortgage Bankers Association.

“A slew of recent data releases along with significant historical revisions point to both an economy and housing market that entered 2023 on a stronger footing than previously anticipated,” Fannie Mae economists said in commentary accompanying their February housing forecast.

Paradoxically, the stronger-than-expected economic data “strengthens the case for the Federal Reserve to maintain a tighter policy stance for longer,” Fannie Mae forecasters said, noting that futures markets see the Fed continuing the raise the federal funds rate to 5.5 percent by mid-year 2023 before reversing course and cutting rates at the end of 2023.

But a recession still looms, as “consumption continues to outpace income, a trend that is unsustainable long term,” Fannie Mae economists predict. “We view a soft landing, though possible, as unlikely. Fundamentally, personal consumption remains at a level that is unsustainably high relative to incomes, pointing to eventual consumer spending retrenchment.”

Fannie Mae forecasters see rates for 30-year fixed-rate mortgages dropping below 6 percent in the second half of the year, and continuing to fall to 5.1 percent by the end of 2024. Economists at the Mortgage Bankers Association are forecasting a more precipitous drop, with mortgage rates falling below 5 percent in the second half of 2024.

Home sales seen rebounding next year

Source: Fannie Mae Housing Forecast, February 2023.

While mortgage rates aren’t expected to return to 2022 highs, tight inventories, ongoing affordability constraints, and the “lock-in” effect that disincentivizes current homeowners to give up the low rate on their mortgage, are expected to continue to limit home sales this year.

Thanks to the strong start to the year, Fannie Mae economists expect 4.67 million home sales this year, up from last month’s forecast of 4.52 million. That would still represent a 17.6 percent decline from last year’s 5.67 million sales, and the slowest annual pace of sales since 2011, Fannie Mae economists noted.

The forecast envisions a “partial rebound” in 2024, with total sales rising 9.6 percent to 5.12 million units as the broader economy recovers.

Sales of existing homes, which are projected to fall by 19.2 percent this year, are also expected to lead the 2024 recovery, growing by 10.4 percent to 4.48 million.

Fannie Mae forecasters see new home starts softening as builders work through existing inventories. While new home sales are only expected to drop by 5.4 percent this year, to 609,000 units, they’re also forecast to rebound more modestly next year, growing by 4.3 percent, to 635,000 units.

“Fundamentally, there continues to be an elevated number of homes under construction or completed that are for sale relative to the recent sales pace,” Fannie Mae economists said. “Therefore, we expect homebuilders to slow the pace of new starts in coming months as they turn to generating sales by working through their current inventories. This heightened level of inventory is partly why we expect new home sales to remain resilient relative to existing-home sales.”

Purchase loan volume expected to bottom this year

Source: Fannie Mae Housing Forecast, February 2023.

In line with the stronger-than-expected start to the year for housing sales, Fannie Mae economists upped their forecast for 2023 purchase loan volume to $1.317 trillion, up $38 billion from last month. That would still represent a 20.7 percent decline from 2022 purchase loan originations of $1.66 trillion.

Purchase loan volume is expected to rebound by 10.4 percent next year, to $1.454 trillion, as the housing market recovers from the predicted recession. That’s an upgrade of $32 billion from Fannie Mae’s January forecast.

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Email Matt Carter

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