Fannie Mae tweaks its recession forecast

Even as some observers are hedging their views on whether an economic downturn will take place, Fannie Mae is holding fast to its expectations of a modest recession.

However, the government-sponsored enterprise did push out the start date a little farther out to include both the fourth quarter and the first quarter of next year.

"The Fed's policy tightening in an effort to quell inflation is probably close to finished, although their guidance is really more current than forward, and incoming data will be determinant," said Doug Duncan, Fannie Mae's chief economist, said in a press release. "The decline in headline inflation is encouraging, but year-over-year measures will work against further progress in the second half of 2023."

Fannie Mae increased its fourth quarter gross domestic product forecast to call for 1.1% year-over-year growth, up from 0.1%, as previously released first quarter data was upwardly revised.

Still, Duncan expects one or two more short-term rate increases from the Federal Open Market Committee and for it to stick to its "higher-for-longer" policy until it believes core inflation is sustainably at the 2% target.

"Putting aside any temporary volatility, we expect mortgage rates to stay higher as well," Duncan said. "While spreads have come in a bit recently, they remain well above longer-term levels and that means rates for consumers will likely stay elevated."

The market is still affected by the lack of existing homes for sale, which Duncan said is near the low point of the Financial Crisis in 2009.

"As we noted in our April 2022 forecast, whether there is a mild recession (our base case) or a soft landing, the supply issues in housing will provide a downside cushion for economic activity," he continued. "That is playing out quite close to forecast on existing homes, but new construction has been even more supportive than we expected."

As the economy slows, the pace of home price growth should also decelerate. Another impact on prices will be from newly constructed homes hitting the market. Affordability challenges are another restrictor on demand.

Meanwhile, the benchmark 10-year Treasury, one of the factors in pricing 30-year fixed rate mortgages, has dropped significantly in the past week-plus After hitting an intraday high of 4.09% on July 10, it closed 30 basis points lower at 3.79% on July 18.

The Mortgage Bankers Association's latest Weekly Application Survey reported a 20-basis-point decline in the 30-year conforming mortgage to 6.87% for the period ended July 14.

"Putting aside any temporary volatility, we expect mortgage rates to stay higher as well," Duncan said. "While spreads have come in a bit recently, they remain well above longer-term levels and that means rates for consumers will likely stay elevated."

Yet Duncan raised his 2023 forecast for mortgage originations to $1.617 trillion from June's $1.588 trillion. The increase was entirely from him upping the purchase outlook to $1.352 trillion $1.318 trillion. That includes raising the third quarter purchase prediction by $14 billion and the fourth quarter's by $19 billion.

His prediction of $264 billion for refinance volume was down from $270 billion one month prior.

Fannie Mae's 2024 prediction for total production of over $1.9 trillion was virtually unchanged, but July's purchase forecast of $1.437 trillion was $29 billion higher than the prior month. That was offset by a $28 billion cut in the refi forecast to $465 billion.

Duncan doesn't expect the average for the 30-year FRM to go back below 6% until the second quarter of next year. The Mortgage Bankers Association's June forecast called for mortgage rates to average 5.8% at the end of 2023.