Key Takeaways:
– Soaring interest rates and a higher-for-longer policy will have negative effects on the economy.
– The recent increase in long-term rates is likely due to expectations of resilient economic growth and a longer-lasting monetary policy from the Federal Reserve.
– Fannie Mae does not anticipate additional rate hikes from the Fed.
– The economy may face fewer structural headwinds than previously thought.
– Personal consumption expenditure inflation and consumer price index both remained elevated.
– Fannie Mae revised its 2023 real GDP prediction to 2.5% but expects a modest recession in the first half of 2024.
– Fannie Mae revised its 2023 home price expectation to 6.7% and expects home price growth to decelerate in 2024.
– Home sales are projected to decline, but the slowdown will be less severe than in 2022.
– Existing home sales are expected to fall below 4 million units in the fourth quarter.
– New home sales are holding up better than existing home sales due to inventory constraints.
– Fannie Mae forecasts mortgage originations to remain unchanged in 2023 and expects a 10% increase in purchase volumes in 2024.
– The higher mortgage rate environment will continue to dampen housing activity and complicate housing affordability.
HousingWire:
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.
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Property Chomp’s Take:
Hey there! Today, let’s talk about the impact of soaring interest rates and a higher-for-longer policy on the economy, according to Fannie Mae’s Economic and Strategic Research (ESR) group.
So, what’s been going on? Well, the recent increase in long-term rates can be attributed to a variety of factors, such as expectations of stronger economic growth and a more persistent monetary policy stance from the Federal Reserve. In the span of just three months, the 10-year treasury yield went up by a full percentage point, peaking at 4.91% on October 18.
Due to this surge in long-term rates, Fannie Mae does not anticipate any further rate hikes from the Federal Reserve, as stated by Doug Duncan, Fannie Mae’s senior vice president and chief economist. Several Fed officials have also emphasized the need for a rate pause, acknowledging that rates will stay higher for an extended period. The Mortgage Bankers Association (MBA) had previously predicted a pause in rate hikes, citing that real rates (inflation-adjusted) are currently at 2%.
But it’s not all bad news. Fannie Mae has observed that the economy might face fewer structural challenges than previously believed. Recent updates to the national accounts indicate a better balance between real consumption and incomes than previously reported. Personal consumption expenditure (PCE) inflation remained high at 3.5% year over year in August, while September’s consumer price index (CPI) rose by 3.7% year over year, matching August’s increase and surpassing economists’ expectations.
Duncan believes that personal consumption has remained resilient and that the revised data suggests consumers are in a better position than initially thought. This increases the likelihood of an economic “soft landing.” However, Fannie Mae still predicts a modest recession in the first half of 2024, even though the ESR group revised its 2023 real GDP prediction to 2.5% on a Q4/Q4 basis.
Now, let’s talk about the housing market. Home prices have proven to be more resilient than anticipated, leading Fannie Mae to revise its 2023 home price expectation from 3.9% to 6.7% on a Q4/Q4 basis. However, Fannie Mae predicts that home price growth will slow down in 2024 due to ongoing affordability constraints.
The run-up in mortgage rates is expected to dampen housing activity and further complicate housing affordability into 2024, according to Duncan. While the ESR group projects that declines in home sales will be less pronounced than in 2022, the annualized pace of existing home sales is anticipated to fall below 4 million units in the fourth quarter. New home sales, on the other hand, are holding up better due to inventory constraints, although the ESR group forecasts a modest deceleration in both new single-family sales and starts in the coming quarters.
Looking ahead, Fannie Mae expects mortgage originations in 2023 to remain relatively unchanged at $1.3 trillion. In 2024, they anticipate a 10% increase in purchase volumes to $1.4 trillion, driven by stronger home price expectations.
In conclusion, the combination of soaring interest rates and a higher-for-longer policy is expected to have a significant impact on the economy. While it may lead to a slowdown in housing activity and complicate affordability, there are some positive signs indicating a more resilient economy. It’s crucial to monitor these trends and make informed decisions in response to the evolving market conditions.
