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Press Release

Mild Recession Remains Likeliest Outcome as Inflation and Labor Markets Cool

September 18, 2023
Housing Faces Renewed Headwinds from 7 Percent Mortgage Rates, but Downside Risk to Home Sales is Limited

WASHINGTON, DC – With underlying inflation decelerating and signs that the labor market is cooling, the central question for economists remains whether the economy is headed for a soft landing or a mild recession. According to the September 2023 commentary from the Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group, mixed signals from key economic data releases continue to muddle the near-term outlook – and the answer to that question – but a modest contraction remains the most likely outcome as consumption continues to outpace incomes and previous monetary policy tightening works its way through the system. Significant divergence between gross domestic product (GDP) and gross domestic income (GDI) over the past three quarters increases the risk that the ESR Group’s 2023 GDP forecast, which was upgraded this month by three-tenths to 2.2 percent on a Q4/Q4 basis, will come in lower than currently expected. Regardless, the ESR Group notes that robust consumption growth in July was likely due to a series of temporary factors, and credit card transaction data and control group retail sales suggest real consumption growth will pull back in August.

The housing market faces renewed headwinds with mortgage rates settling above 7 percent, according to the ESR Group. Still, the downside risk to total home sales is limited as more sales are being driven by life events rather than discretionary factors, and the cash share of purchases remains high. New home sales were surprisingly strong in the first half of the year, due partly to homebuilder rate buydowns, which become more expensive when mortgage rates rise. Going forward, the ESR Group expects new home sales to pull back slightly due to the higher mortgage rate environment and recent decline in homebuilder confidence.

“In April 2022 we noted our expectation that the combination of dissipating stimulus impact and tightening monetary policy would result in a mild recession in the second half of 2023; mild in part because we expected the housing supply shortage to keep production from falling significantly,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. “Housing production has indeed held up. However, the pandemic-related fiscal transfers and built-up household savings have supported consumer spending longer than we had expected, providing unforeseen support to the macroeconomy. 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.”

Duncan continued: “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. 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. The elevated share of new homes relative to total home sales and a similarly elevated share of first-time homebuyers purchasing new homes are additional evidence of the ongoing housing supply problem. 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.”

Visit the Economic & Strategic Research site at to read the full September 2023 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary. To receive e-mail updates with other housing market research from Fannie Mae’s Economic & Strategic Research Group, please click here.

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae’s Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae’s business prospects or expected results, are based on a number of assumptions,and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR Group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

About the ESR Group
Fannie Mae’s Economic and Strategic Research Group, led by Chief Economist Doug Duncan, studies current data, analyzes historical and emerging trends, and conducts surveys of consumer and mortgage lender groups to provide forecasts and analyses on the economy, housing, and mortgage markets. The ESR Group was awarded the prestigious 2022 Lawrence R. Klein Award for Blue Chip Forecast Accuracy based on the accuracy of its macroeconomic forecasts published over the 4-year period from 2018 to 2021.

About Fannie Mae
Fannie Mae advances equitable and sustainable access to homeownership and quality, affordable rental housing for millions of people across America. We enable the 30-year fixed-rate mortgage and drive responsible innovation to make homebuying and renting easier, fairer, and more accessible. To learn more, visit: | Twitter | Facebook | LinkedIn | Instagram | YouTube | Blog

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