New 2023 forecast: Expect a modest economic contraction in 2023’s second half, but the housing market should help cushion that even if its pace slows a bit.
WASHINGTON – The housing market may save the economy from the severity of another Great Recession, according to a new report from Fannie Mae economists. But a recession is still likely on the horizon.
With inflation running at a 40-year high and uncertainties growing in the economy, economists are revising their outlooks for 2022 and 2023. Mortgage financing giant Fannie Mae says that expectations of aggressive monetary policy tightening through 2023 by the Federal Reserve will “likely further soften economic output already weighed down by decades-high inflation and the ongoing effects stemming from the Russian invasion of Ukraine.”
Fannie Mae’s Economic and Strategic Research Group outlined the latest predictions in its April 2022 commentary.
The group’s forecast downgrades real GDP growth and includes an expectation of a period of modest economic contraction in the second half of 2023. But economists are quick to note that the projected downturn will not likely resemble the severity or duration of the Great Recession in 2008.
They say the downturn will likely be less severe because of the housing market, stronger mortgage credit quality, a far less-leveraged residential real estate and mortgage financing system, and ongoing housing supply constraints compared to demographic demand.
“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,” says Doug Duncan, Fannie Mae’s senior vice president and chief economist. “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.”
Fannie Mae’s updated 2023 forecast includes a “modest recession.”
But while the housing market is expected to help cushion a lot of that, economists also note that the housing market will likely slow in the coming months as well. Higher mortgage rates are pricing out more would-be homebuyers.
The National Association of Realtors® predicts a 10% decrease in home sales for 2022.
“The housing market is starting to feel the impact of sharply rising mortgage rates and higher inflation taking a hit on purchasing power,” Lawrence Yun, NAR’s chief economist, said in response to NAR’s latest existing-home sales report which showed a contraction in home purchases.
Home sales remain quick and prices are still rising, but “sellers should not expect the easy-profit gains and should look for multiple offers to fade as demand continues to subside,” Yun added.
Source: “Inflation Rate Signals Tighter Monetary Policy and Threatens ‘Soft Landing,’” Fannie Mae (April 19, 2022)
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