2023 predictions that economists got wrong

December 20, 2023 4:00 AM

A year ago, housing and economic researchers were largely aligned in their predictions of a looming recession, expecting lower interest rates by the end of 2023 thanks to likely cuts from the Federal Reserve and moderating or even negative home price growth.

Twelve months later, the recession is taking its time to arrive, mortgage rates are almost half a percentage point higher and prices continue to head upward.

Economic forecasts can serve as an important resource businesses in the housing market turn to when planning spending for the year ahead. When the best-modeled predictions miss the mark, the effect can leave an outsized dent on the bottom line.

"In some cases, you budget off of that from a production standpoint," said Kenny Hodges, CEO of Assurance Financial. "If you budget your production off of that, then you budget your revenue and you budget your personnel, staffing, your expenses."

Mortgage companies might be forgiven if they are treating the 2024 outlook with some skepticism. "It's funny, all the same forecasts that I'm hearing right now from the economists — it's the exact same forecast that we got last year. It just didn't pan out for 2023," Hodges said.

What made the past 12 months challenging to accurately gauge was the lingering effect of Covid-19 on the U.S. economy. "A lot of the economic theories that we work with when we develop these forecasts, to some extent, have been broken," said Selma Hepp, chief economist at Corelogic.

This past year has been exceptional for the stark difference between the predictions and the reality of the housing market at the end of 2023. Several mortgage leaders took a look back to share their opinions about the forecasts that blew off course and hit the mark.

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Mortgage rates went up instead of down (for most of the year)

With the average 30-year rate starting 2023 above 6% in January — a more-than-twofold rise from early 2022 — the mortgage industry yearned for a pullback to counter the rapid rise that stifled borrower sentiment. While the consensus view pointed to rates declining in 2023, few envisioned them heading in the opposite direction to a 23-year high. After briefly flirting with the 8% mark in October, current 30-year rates are closing 2023 approximately 60 basis points higher year over year.

A large miss on interest rate projections will ripple throughout the housing industry. "There's so many offshoots that have to do with rates," said Joey Davidson, CEO of Acopia Home Loans.

"It's consumer confidence, and it's builder confidence. In a way, it's home prices, its inventories — all those things stem from what the interest rate environment is doing."

Driving rates higher was the stickiness of inflation and resilience of the economy. Experts failed to account for how the Federal Reserve would respond, Hodges said. Between January and July, the central bank raised the federal funds rate four times before pausing the rest of the year.

"They underestimated what the Fed was going to do," he said, while noting the effect the Fed's quantitative tightening policy had at keeping rates elevated.

When comparing spreads of the last 15 years prior to 2022 and the current level, "we've lived in the 180 basis point range somewhere. And we've been at a 300 basis points range. That is another factor that I think that had a much bigger impact on our rates than was forecast," Hodges said.

Researchers may also be overlooking historical patterns more than they should be by focusing too heavily on what the housing market did between 2009 and 2021. "That was just not a normal time period," Davidson suggested.

"It was bookended by two once-in-a-lifetime events, a mortgage meltdown and a global pandemic. So you've got to look at everything before that and everything after that to see what the new normal is," he added.

But it wasn't just the housing industry who misread where rates would go. "Think about the banks that went belly up. They were hedging wrong," Hepp said, referring to the spring crisis that saw the failure of some of the country's largest regional financial institutions.

The recession that hasn’t arrived (yet)

All vectors appeared to forecast that the U.S. would fall into recession by mid 2023, according to economists across the financial industry. By the end of the second quarter, though, with conditions from the labor market to gross domestic product still stronger than expected, the recession timeline was pushed out to the second half of the year. As the end of 2023 approaches, opinions are diverging with some surmising onset is still in the cards for 2024, while a growing number say the U.S. might manage to avoid one altogether.

A recessionary threat is closely tied to inflation levels and consumer spending, and Americans may have themselves largely to thank for keeping the recession at bay in 2023.

Despite rising prices and predictions of an eventual slowdown, the American consumer shrugged off the doom-and-gloom headlines, said Kevin Schalk, partner and leader of the capital markets industry division at accounting and advisory firm, Baker Tilly. "Spending habits didn't change as a result of this."

Pandemic relief measures are still playing a role in disrupting usual spending patterns, with excess liquidity from economic stimulus programs still sitting in many bank accounts, keeping commerce humming, according to Schalk.

Consumers' relationship toward spending has also shifted as a result. "The fear of a recession and all this inflation didn't have this scare effect that it may have otherwise had in different times," Schalk said.

"We're OK spending on credit cards, and credit card debt continues to climb."

Affordability relief? Not so fast

While home prices would normally ease as rates rise and demand falls, the opposite occurred in 2023's unusual housing market. Rates in 2023, instead, effectively kept prices elevated, primarily due to their rapid acceleration in 2022, which disincentivized homeowners from selling and resulted in a dearth of listings.

"What everybody was expecting was more inventory," Hepp said. "I don't think that we realized the extent to which people were going to feel locked in."

For buyers, it meant little affordability relief. Although some of the leading price indexes showed a few instances of downward monthly movement in the first half of 2023, home values never achieved negative annual growth, a development some economists said would occur by the end of second quarter.

CoreLogic's home price data showed property values up by 4.7% annually in October. Fannie Mae's index came in 5.3% higher at the end of the third quarter, while the Federal Housing Finance Agency similarly found prices up by 5.5%.

An overlooked factor behind the tighter inventory of today that could persist beyond the short-term is a change in the lifestyle of older homeowners, a segment of the population that historically could be relied upon to add to housing inventory.

"Where we would see older people downsizing, the inventory is not there for them," said Dave Miller, executive vice president of business development at mortgage subservicer Cenlar.

"The rates are high. And if they go to a rental, the rental rates are through the roof today," Miller added. "Are there more people that, in the past. would have made that decision that are just staying put, staying where they are?"

M&A is occurring at a slower-than-anticipated pace

The originations outlook at the end of 2022 created expectations of a rush of mergers and acquisitions in the following 12 months. While several deals have gone through, and M&A activity continues, volumes haven't corresponded to the outlook of a year ago, according to Jim Clapp, president of Certainty Home Lending. Instead of a torrent, the industry only saw waves.

"To me, the one shocking thing is that we didn't see — every other week — some major merger or acquisition announced," Clapp said.

"I don't know if that means they've fallen apart, or they're still in process, or people are just taking all that money they made in 2021 and pumping it in."

Much of the chatter of a year ago led some to brace themselves for a repeat of what occurred during the Great Financial Crisis when "mortgage companies were basically going out of business on a daily basis," Clapp said.

"I think the list got up to 150 or 200. People kind of predicted we'd go into that kind of market."

Poor company valuations are likely keeping M&A activity suppressed, at least from the side of potential sellers, said Certainty's CEO Franco Terango. "Nobody's going to get a premium in this market and, to that point, it's a little less appetizing to sell or to merge unless you have to."

But among the deals that went through was the most significant merger the mortgage industry saw in years, between Black Knight and Intercontinental Exchange. Despite industry pushback and antitrust concerns that put the outcome in doubt, the deal was approved in late summer, leading to a realignment of the mortgage software landscape to end 2023.

But loan performance held up as expected

Where predictions largely held up was in the servicing space.

While some warnings emerged at the end of 2022 about an increase in loan distress in the face of a slowing economy and possible recession, most forecasters' accurately managed to gauge the health of the typical homeowner, Hepp said.

"Because labor shortages were so persistent prior to this year, there was a sense that people would be able to find a job pretty quickly. So we were not expecting any sort of wave of foreclosures."

Continued availability of loss mitigation measures also are having their desired effect, according to Miller. "We're not seeing the delinquency rate go as high as we might otherwise think."

In situations where performance comes in as expected, the servicing industry has the luxury to prepare, train and stress test for future upticks in distress, he added.

Even when home prices pulled back, homeowners had a solid financial buffer from the steep acceleration in 2021, Hepp noted. "So we were not concerned about existing homeowners to the extent of housing busts."