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Soaring interest rates and a higher-for-longer policy will take its toll on the economy, according to Fannie Mae’s Economic and Strategic Research (ESR) group.
“The cause of the recent run-up in long-term rates is multifactorial and likely includes some expectation of more resilient economic growth coupled with a higher-for-longer monetary policy stance from the Federal Reserve,” the ESR group said in its latest economic commentary.
After the 10-year treasury yield began July at around 3.8%, rates were about one full percentage point higher three months later. On October 18, the 10-year treasury yield peaked at 4.91%.
In part because of the recent run-up in long-term rates, Fannie Mae does not expect additional Fed rate hikes, Doug Duncan, Fannie Mae’s senior vice president and chief economist, said.
Several Fed officials have indicated that a rate pause is necessary while stressing rates will remain higher for longer. The Mortgage Bankers Association (MBA) had also expected the central bank would pause on rate hikes as real rates – which are inflation-adjusted– are 2%. Philly Fed P
Fannie Mae noted that the economy likely faces fewer structural headwinds than previously thought after significant updates to the national accounts showed real consumption and incomes are in better balance than had been reported previously.
Personal consumption expenditure (PCE) inflation remained elevated in August at 3.5% year over year and September’s consumer price index (CPI) rose 3.7% year over year, holding steady with August’s annual gain and above economists’ expectations.
“Personal consumption has not only remained resilient, but recent official data revisions indicate that the consumer has been in a better position than previously thought, increasingly the likelihood of an economic ‘soft landing,’” Duncan said.
The ESR group revised its 2023 real GDP prediction to 2.5% on a Q4/Q4 basis but continues to expect a modest recession in the first half of 2024.
Home prices proved more resilient than expected, in turn leading Fannie Mae to revise its 2023 home price expectation from 3.9% to 6.7% on a Q4/Q4 basis.
Fannie Mae forecast that home price growth will decelerate in 2024 as affordability remains constrained.
Further declines in home sales from an already low level due to the run-up in mortgage rates will likely be muted relative to the slowdown in 2022, the ESR group projected.
But the annualized pace of existing home sales are expected to fall below 4 million units in the fourth quarter, according to Fannie Mae.
New home sales continue to hold up better than existing home sales due to ongoing inventory constraints, though the ESR group’s forecast calls for a modest deceleration in both new single-family sales and starts in coming quarters.
Fannie Mae forecasts 2023 mortgage originations to remain roughly unchanged from last month at $1.3 trillion.
In 2024, Fannie Mae expects purchase volumes to rise 10% to $1.4 trillion, a $7 billion increase from September’s forecast as stronger home price expectation outweighs minor downward revisions to the sales forecast.
“We expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability into 2024,” Duncan said.
