Mild recession still in the cards for U.S. economy but not until 2024: Fannie Mae

Fannie revised its outlook on when the U.S. economy is expected to enter a mild recession. (iStock)

The forecast for the U.S. economy has improved, but mortgage giant Fannie Mae is still predicting a mild recession in the first half of 2024 as consumer spending continues to outpace incomes and the Federal Reserve’s previous interest rate increases work its way through the system. 

Fannie Mae had previously anticipated the economy would enter into a mild recession in the second half of 2023. However, resilient home prices, which have picked up steam in recent months and strong household savings have supported consumer spending longer than expected, boosting the macroeconomy, according to its latest economic forecast report. 

The mortgage giant upgraded its 2023 Gross Domestic Product (GDP) growth outlook to 2.2% from 1.9%. Inflation, which has been showing signs of moderation in recent months, is expected to end the year at 3.1% and will slow to 2.4% in 2024.

Healthy economic growth paired with slowing inflation and steady job growth supports the narrative that the economy is headed towards a soft landing. Federal Reserve Chair Jerome Powell said at a press conference following the central banks’s September interest rate meeting that he would not call a soft landing a baseline expectation but noted that it was a plausible outcome. 

The Fed has raised rates 11 times since 2022 as it looks to bring inflation down to 2%. In September, it held rates steady but projected at least one more increase before it began to reverse course. The federal funds rate is at a 22-year high of 5.25% to 5.5% and is likely to be 5.6% at the end of this year.

“Our current prediction for a mild downturn in the first half of 2024 is predicated on the belief that consumers will begin pausing their spending, in part due to the exhaustion of those funds and having to realign to a more sustainable relationship between spending and incomes,” said Fannie Mae Senior Vice President and Chief Economist Doug Duncan.

If you are looking to take advantage of the current mortgage rates by refinancing your mortgage loan or are ready to shop for the best rate on a loan, consider visiting an online marketplace like Credible to compare rates and get preapproved with multiple lenders at once.

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High mortgage rates stall housing market

Home prices have increased despite the growing affordability crisis, leaving many Americans stranded on the sidelines. The 30-year mortgage rate has topped 7% for most of September, with no indication that it will see a meaningful drop anytime this year. The Mortgage Bankers Association (MBA) expects the 30-year fixed rate to fall below 6% until the second quarter of 2024, according to its September Mortgage Finance Forecast. 

The combined impact of higher rates and higher home prices has driven the cost of financing the typical listed home up more than $400 or 22.5% from a year ago and up more than $1,100 from August 2020, doubling the cost in three years, according to Realtor.com. Fannie Mae is now forecasting total home sales to be around 4.8 million in 2023 – the slowest annual pace since 2011 and 4.9 million in 2024. Similarly, its expectation for 2023 mortgage originations dropped to $1.56 trillion from $1.60 trillion.

“According to our latest National Housing Survey, households remain confident in their own employment, even though they don’t feel great about the overall economy, and the vast majority don’t believe it’s a good time to buy a home, as mortgage rates and home prices continue to constrain affordability,” Duncan said. “This is evidenced by recession-level home sales volumes resulting from the very low levels of existing homes for sale and the significant affordability challenges. 

“We expect that total housing market activity will remain at a low level into 2024 as the Federal Reserve continues to hold the line on interest rates against inflation,” Duncan continued.

Shopping for the best deal in a high mortgage rate environment can bring savings. If you’re trying to find the best mortgage rate, using the Credible marketplace to compare options from different lenders can help you compare your options at once without affecting your credit score.

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Supply issues pushing home prices up

Homeowners locked into the historically low mortgage rates of before and during the pandemic are reluctant to sell their homes. As many as one in seven homeowners have opted out of the market because they want to avoid borrowing at today’s much higher rates, sometimes double their existing cost of funds, according to Realtor.com.

A small shift in rates could change the outlook for many homebuyers, according to a recent survey from Point.

More than 89% of homeowners said they would consider a move in the next 6 to 12 months if mortgage rates dropped below 6%, according to the Point survey. Increasing the housing supply could lower prices and bring some relief to homebuyers. 

If you are looking to reduce your expenses, you could consider refinancing your home loan to lower your monthly payment. Visit Credible to compare multiple mortgage lenders at once and choose the one with the best interest rate for you.

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