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Economic & Housing Outlook

Growth Expected to Resume After a Mild Downturn in 2023

November 21, 2022

This is the first month that our forecast includes the 2024 outlook. We project real GDP growth in 2024 to be 2.0 percent on a Q4/Q4 basis, reflecting the start of a recovery following an anticipated 2023 contraction of 0.6 percent (down one-tenth from our previous forecast). We still expect a modest recession to begin in the first quarter of 2023 as the full effects of tightening monetary policy and weaker global growth weigh on the economy. Our projection for 2022 growth is 0.0 percent, up 0.1 percentage points from our previous forecast.

For our inaugural 2024 home sales forecast, we project total sales of 5.25 million units, up 18.6 percent from our forecast for 2023, reflecting our expectations for a modest pullback in mortgage rates and a broader economic recovery, as well as an ongoing housing supply deficit helping drive new home sales. Our home sales forecasts for 2022 and 2023 are essentially unchanged from last month at 5.67 million and 4.42 million units, respectively. Home sales are projected to hit a trough in Q2 2023, at a selling pace of 4.27 million annualized units, as the full effect of higher mortgage rates and the projected recession take hold. It should be noted, however, that following the most recent Consumer Price Index (CPI) report, longer-run interest rates fell by about 30 basis points compared to when our interest rate forecast was completed, suggesting some upside risk to our home sales forecast over the coming quarters.

Given the modest changes to our outlook for home sales and mortgage rates, we have increased slightly our forecast for 2022 mortgage originations to $2.34 trillion (previously $2.33 trillion), while lowering our 2023 originations forecast to $1.71 trillion (previously $1.74 trillion). We forecast 2024 originations will total $2.11 trillion.

Q3 GDP Rebounds but Underlying Trend Still Stagnating
GDP returned to positive territory in Q3, increasing at a seasonally adjusted annualized rate (SAAR) of 2.6 percent after two negative readings in the first half of 2022. The underlying details, however, were much weaker than the headline figure suggests. Volatility in international trade, which has ebbed and flowed along with supply chain issues and businesses restocking inventories, has had an outsized effect on the topline GDP numbers this year. Just as a widening of the trade deficit tipped first half GDP into negative territory, a narrowing in Q3 added a whopping 2.8 percentage points to the Q3 number. Real final sales to private domestic purchasers, the sum of personal consumption expenditures and gross fixed private investment, is a better measure of the underlying growth trend in current circumstances, and it points to a continuation of growth stagnation, with this measure of output rising only 0.1 percent annualized over the quarter.

 While GDP has been volatile, underlying growth has slowed and is now stagnating

With the effects of rising interest rates yet to be fully felt in the broader economy and many forward-looking indicators weakening, we continue to expect that an economic contraction will occur in 2023. In September, the Conference Board Leading Economic Index® (LEI) fell by 0.4 percent, the sixth decline in the past seven months. Meanwhile, residential fixed investment continues to decline sharply, falling at a 26.4 percent annualized rate in the third quarter. Historically, both the LEI and residential fixed investment lead the business cycle. Weakness in the Institute for Supply Management (ISM) Manufacturing Index and other regional Fed surveys also points to softening business conditions in the near future.

Additionally, while households in aggregate continue to hold a large amount of “excess savings” relative to the pre-pandemic trend that could be used to fuel further consumer spending, the stock of these savings is not held evenly, and many consumers appear to be increasingly tapping into consumer credit to maintain spending. The September personal saving rate of 3.1 percent is now well below the pre-pandemic norm, which suggests limited additional consumer spending growth in excess of real income growth. Further, according to measures, such as the Case-Shiller and FHFA Purchase-Only indices, house prices are now declining on a monthly basis, and according to the Fannie Mae Home Purchase Sentiment Index®, consumers now expect home values to decline over the next twelve months. This will likely contribute to slower consumption growth because of a negative “wealth effect,” in which households are less likely to dip into savings or take on more debt because they feel that their assets are declining in value. Taken together, we expect a modestly negative Q4 2022 GDP print due to softening consumer spending, declining residential fixed investment, and stabilization in net exports.

The one major area pointing to continued economic strength is the labor market. In October, 261,000 jobs were added, bringing the total gained in 2022 to more than 4 million. Additionally, the September Job Openings and Labor Turnover Survey (JOLTS) showed an addition of 437,000 new job vacancies, reversing roughly half of August’s decline in openings and continuing to signal that labor demand remains strong. Still, labor is a lagging indicator, and a simple analysis of recessions since 1980 (excluding the COVID-induced recession) shows that the labor market does not generally turn until an actual recession begins (this is partially by definition, as the National Bureau of Economic Research (NBER) states they have given higher weight to nonfarm payroll employment than some other indicators in recent decades when dating business cycles). Additionally, there is not a consistent trend of deceleration when comparing employment gains six months and three months before a recession begins.

 Payroll gains before past recessions do not show clear pattern of deceleration until the recession begins

As such, we do not view the current strength in the labor market as inherently at odds with our Q1 2023 recession call, though it is something that merits monitoring. Of course, the most notable difference in the labor market between past recessions and current conditions is the level of labor market gains, which are more than triple the average of past recessions. Still, the three-month moving average of employment gains is trending downward and will likely continue in that direction through Q4 2022 as business sentiment indicators, such as the National Federation of Independent Business’ (NFIB) Small Business Optimism Index, again fell in October and has been below pre-pandemic 2019 levels for more than a year.

Not Out of the Woods Yet, But Inflation May Have Peaked
The October CPI report came in lower than both consensus and our expectations, rising 0.4 percent over the month and 7.7 percent on an annual basis, a deceleration of five-tenths compared to September’s report. While monthly inflation data can be volatile, as has been the case recently, there are signs in this report that inflationary pressures may be easing broadly. We have long predicted that core goods prices would eventually drag on CPI as supply chain pressures eased and demand for goods declined, something which appears to have finally materialized in this report. Especially of note was a 2.4 percent decline in used auto prices. Further, core services inflation got some relief from falling health care prices, stemming from the lagged effect of how the BLS calculates health insurance costs. Both of these trends are likely to continue.

Looking at overall inflation from a top-down approach also suggests further annual deceleration. With the Fed funds rate now comfortably above what is generally considered to be a neutral stance, monetary policy should be exerting downward pressure on the price level. As measured by the M2 monetary aggregate, annual broad money supply growth has decelerated sharply in recent months. While the correlation isn't perfect when money supply is oscillating around a more stable trend, large changes tend to lead annual inflation measures by about a year to a year and a half. This points to a decelerating inflationary trend over the next year.

 Deceleration in M2 money supply suggests inflation will cool further in the coming months

The Fed has consistently expressed concern about inflationary pressures stemming from tight labor markets leading to a wage-price spiral dynamic. This pressure is reflected most clearly in the services (less shelter and energy) component of the CPI. This component added 1.7 percentage points to headline year-over-year CPI, and that includes the drag from healthcare services. While wage gains have not been the primary contributor to inflation to date, wage-price-driven inflation is historically difficult to subdue once it begins, and the current rate is at a level that is inconsistent with overall 2 percent inflation. In our view, the growing impact of this inflationary source will likely prompt the Fed to remain aggressive in its monetary tightening position. Fed officials have repeatedly commented on a desire to see loosening in the labor market to ease this underlying inflationary pressure. While we expect the Fed to slow the pace of its rate hikes at upcoming meetings, we anticipate the terminal rate will near 5 percent.

Home Sales Expected to Continue to Decline
According to the National Association of REALTORS®, existing home sales continue to trend downward, falling 1.5 percent in September to a SAAR pace of 4.71 million units. Pending sales, which lead closings on average by 30-45 days, also fell 10.2 percent in September and purchase mortgage applications trended downward over the past month according to the Mortgage Bankers Association. Together, these point to further existing home sales declines over the remaining months of 2022. We forecast total existing home sales will be 5.03 million in 2022 and 3.90 million in 2023 before rebounding in 2024 to a pace of 4.60 million.

With mortgage rates continuing to rise over the past month, (the 30-year fixed-rate mortgage was 7.08 percent according to the November 10 Freddie Mac survey) the full effects of rate increases on home sales have yet to be felt. Affordability measures are strained, which we expect will continue to limit home purchases by first-time homebuyers. However, perhaps the larger effect on total home sales is a growing "lock-in effect," which is the financial disincentive for existing homeowners with a fixed-rate mortgage that is well below current market rates to put their home on the market, move, and take on a new mortgage rate well above what they had previously. Our rather bearish outlook in 2023 for existing home sales – we are now projecting the lowest annual pace since 2008 – is in part driven by this dynamic. Based on our analysis of historical Fannie Mae loan book data of fixed-rate 30-year mortgages, more than 80 percent of existing borrowers have mortgages at least 200 basis points lower than current market rates as of October and more than 90 percent have mortgages at least 100 basis points lower. This is by far the largest share since at least 2000 (and likely the largest since the late 1970s).

 Most borrowers have a mortgage well below market rates, creating disincentive to move

We are forecasting mortgage rates to pull back somewhat over the next two years. This partially reflects a view of moderating 10-year Treasury rates as the Fed eventually ends its tightening stance, a contracting economy, and the compressing of the Treasury-mortgage rate spread once interest rates stabilize. We believe this should eventually help spur a rebound in sales. However, we expect that going forward this will be the first business cycle since the 1970s in which the trough and peaks in interest rates will be higher than the previous cycle. As such, the "lock-in effect" for existing homeowners will remain in a way that that has not occurred in over 40 years. We expect that this could limit overall home sales over the next business cycle.

 New listings continue to decline as increase in rates exacerbates the “lock-in” effect

The months' supply of existing homes has trended upward over the past year, remaining at 3.2 for the past three months, though up from a recent low of 1.6 in January. However, this is largely due to slower sales rather than an increase in the flow of homes for sale. According to Redfin, after trending upward over the summer, the weekly trend in new listings has slowed and is 17.5 percent below the pace from a year ago. We suspect this is in part due to would-be move-up buyers deciding not to list their existing home for sale given how high current rates are.

Beyond a slower pace of sales, an implication of this lock-in effect is that first-time homebuyers may increasingly turn to new homes in coming years as even fewer existing homeowners put their homes on the market. Given this, homebuilders may focus more on comparatively modest product offerings as the number of move-up buyers is lower relative to past cycles.

In the near term, we expect new home sales to continue to slow, however. As expected, new home sales fell in September by 10.9 percent, following a 24.7 percent surge in August. The August jump coincided with the temporary pullback in mortgage rates over the summer, as well as reports of more aggressive incentives on the part of homebuilders. However, with mortgage rates moving back up since then, we expect new home sales to continue to trend downward. As overall demand is declining, homebuilders are increasingly building up inventories of homes for sale, including those already under construction or completed. Given this divergence of supply and demand, we anticipate more aggressive discounting and incentives going forward as homebuilders try to move available inventory. Therefore, we project new home sales to hold up comparatively well relative to existing sales in coming quarters.

Multifamily housing metrics, which had previously shown a surprising resilience, are now softening, with rent growth slowing markedly and vacancy measures beginning to tick up. While we expect continued solid multifamily construction going forward, when compared to the sector's torrid pace of this past year, we forecast multifamily starts to slow over the next year. We forecast multifamily housing starts to fall 29.3 percent in 2023, after rising 12.9 percent in 2022 to the highest annual pace since 1986.  

Only Modest Changes to Originations Outlook
Our forecast for single-family purchase mortgage originations was only changed slightly from last month, corresponding to minor revisions in the home sales forecast. In particular, we expect $1.64 trillion in single-family purchase mortgage originations in 2022 and $1.34 trillion in 2023, down 18.5 percent year over year, and corresponding to the projected decline in home sales. We then expect purchase volumes to return to $1.57 trillion in 2024 as home sales are forecast to rise again. For single-family refinance originations, we now expect $699 billion in 2022 and $375 billion in 2023, both small downgrades from our prior forecast. We expect refinance volumes to grow to $538 billion in 2024 as mortgage rates are projected to decline somewhat over the year.

Economic & Strategic Research (ESR) Group
November 15, 2022
For a snapshot of macroeconomic and housing data between the monthly forecasts, please read ESR’s Economic and Housing Weekly Notes.

Data sources for charts: Bureau of Economic Analysis, Bureau of Labor Statistics, Federal Reserve, Fannie Mae,

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.

ESR Macroeconomic Forecast Team

  • Doug Duncan, SVP and Chief Economist
  • Mark Palim, VP and Deputy Chief Economist
  • Eric Brescia, Economics Manager
  • Nick Embrey, Economist
  • Nathaniel Drake, Economic Analyst
  • Richard Goyette, Economic Analyst