The aggressive new monetary policy by the central bank is already hindering sectors of the economy after already hit by two years of economic crises.
The government-backed mortgage lender said that the latest news regarding rate hikes will cause a modest recession in the economy next year and that it expects housing to slow over its forecast horizon.
The ESR Group’s latest forecast includes a decline of 0.2 and 2.4 percentage points of real GDP growth in 2022 and 2023, respectively, including an expected period of modest contraction in the economy during the second half of 2023.
“We continue to see multiple drivers of economic growth through 2022, but the need to rein in inflation, combined with other economic indicators, such as the recent inversion of the Treasury yield curve, led us to meaningfully downgrade our expectations for economic growth in 2023,” said Doug Duncan, vice president, and chief economist for Fannie Mae.
“Data from U.S. economic history suggest that successfully negotiating a ‘soft landing’ requires monetary tightening to be pre-emptive rather than responsive,” said Duncan.
Fannie Mae expects a “modest recession, but one that we do not expect to be similar in magnitude or duration to the recession of 2008,” he said.
“The tight labor market and continued demand for workers, the need for firms to rebuild inventories, and the slowing of some transitory inflation impulses all suggest to us that 2022 will grow a bit faster than long-run trend growth. However, as the remaining fiscal policy stimuli fade and the predicted tightening of monetary policy works its way through the economy, we expect the impact of these factors to diminish,” Duncan continued.
Fannie Mae said, its April report shows that housing sales will likely tumble 7.4 percent this year and 9.7 percent the following year.
House-price growth will slow from 20 percent in the first quarter of 2020 to 3.2 percent by the fourth quarter of 2023.
“Historically such large movements have ended with a housing slowdown,” said Duncan and who expects “home sales, house prices, and mortgage volumes to cool over the next two years.”
U.S. 30-year mortgage rates hit 5 percent this month, the first time in more than a decade, as rates skyrocketed since the start of the year.
Duncan said that households with a “30-year, fixed-rate mortgage are unlikely to give that up in favor of a mortgage closer to 5 percent, and we expect this so-called ‘lock-in’ effect to weigh on home sales. Moreover, if mortgage rates remain relatively elevated, we expect the added affordability constraint to price out some would-be first-time homebuyers and contribute to the slowing of demand.”
He said that mortgage rates have risen dramatically over the past few months and that historically such large movements have ended with a housing slowdown.
Fannie Mae estimates that home sales, house prices, and mortgage volumes will cool down over the next two years, as house price growth will “decelerate to a pace more consistent with income growth and interest rates.”
However, the publicly backed lender is hopeful that its projected economic downturn will not resemble the long Great Recession, due to multiple differences from a housing market perspective, such as, “stronger mortgage credit quality, a far less-leveraged residential real estate and mortgage finance system, and a better-equipped mortgage servicer and public policy apparatus, as well as ongoing housing supply constraints relative to demographic demand for housing.”
