In their continued efforts to turn the tide on inflation, the Federal Reserve raised the federal-funds rate 0.75 percentage points for the third consecutive time. 

With that — and with mortgage rates rising above 6% (for a 30-year-fixed) — the latest Fannie Mae report shows forecast changes for the 2022 and 2023 housing market. 

Here’s what’s changed and what it could mean for you and your clients. 

The Federal Reserve’s decision

By a unanimous vote, Fed officials lifted their benchmark federal interest rate to a range between 3% and 3.25%, a level not seen since early 2008. 

By the end of this year, nearly all voting officials expect to raise rates to a range between 4% and 4.5% and project continued raises into 2023. Last June, they expected the federal funds rate to rest at 3.8% by the end of 2023. That figure is now 4.6%. 

With the Fed raising rates at the fastest pace since the 1980s, consumers are understandably worried about the impact on the economy, specifically the housing market.  

In our view, the recent interest rate surge is due to the market’s recognition of two critical factors: that inflation is indeed not transitory, and that, to tame it, the Federal Reserve will need to be resolute, even at the risk of possible recession. Inflation’s entrenchment – and the policy action likely required of the Fed – confirms the expectation in our forecast of a moderate recession beginning in the first quarter of 2023. That said, the rise in rates is having the Fed’s desired effect on housing, as house price growth began to slow in June.

Doug Duncan

Fannie Mae Senior Vice President and Chief Economist

Economic indicators point to recession in 2023

The latest Fed projections have the unemployment rate rising to 4.4% next year, up from 3.7% in August and 3.5% in July. Historically, a jump of that size in that span of time has coincided with an economic recession. 

While Fed officials expect economic growth to continue during the second half of 2022, they pointed to three factors likely to effect a modest recession in 2023: 

  • High inflation
  • Monetary policy tightening (by the Fed)
  • Slowdown in the housing market

Fannie Mae’s Economic and Strategic Research (ESR) Group released its latest report for September 2022 with forecasts for the economy and the housing market.

On a full-year basis, the ESR Group forecasts 0.0% real GDP growth for 2022. But for 2023, the group revised its projection downward by one-tenth of a percentage point to a negative 0.5%. 

Fannie Mae’s revised forecast for mortgage rates

According to Fannie Mae’s revised forecast, mortgage rates are unlikely to ease up in 2023. With the Fed still struggling to get inflation under control, even the moderate recession expected by Fannie Mae economists is unlikely to offer relief. 

In fact, the most drastic change to Fannie Mae’s August forecast is the projection of mortgage rates and where they could be headed in the coming months. 

Last month, forecasters thought the 30-year-fixed mortgage rate had likely peaked during Q2 at 5.2% and expected it to retreat for five consecutive quarters to 4.4% (average) during the second half of 2023. 

Last week, the rate jumped to 6.25% — the highest level since October 2008 — up from 6.01% the week before. With what they’re seeing, forecasters no longer expect mortgage rates to decline in the coming months. 

Mortgage applications and loan volumes

Applications for purchase mortgages the same week were down 30% from a year ago. 

Purchase mortgage volume for 2022 is projected to remain unchanged from August’s forecast, partly due to continued appreciation in home prices. At $1.706 trillion, it’s still a 10.2% drop from 2021. 

Fannie Mae’s September 2022 forecast expects purchase loan volume to fall another 1.5% to $1.681 trillion in 2023. 

Higher mortgage rates have lowered the expected market size for 2022 and 2023 refinancing. Fannie Mae is projecting a 72.6% drop in refinance loan volume this year to $731 billion—$38 billion less than projected in their August forecast. 

Revised forecasts for home sales and the housing market

Fannie Mae’s August forecast projected a 16.2% decline in total home sales for 2022. But with mortgage rates above 6%, they’ve amended that to a 17.2% drop from last year. 

Next year, according to their housing market report, projected sales of new and existing homes will drop another 12.8%. 

Even with July’s new home inventories at their highest level since 2009, Fannie Mae’s analysts suspect purchase incentives by homebuilders haven’t been sufficient to move the growing supply. 

We expect the slowdown in housing to continue through 2023 as affordability constraints mount for potential homebuyers, and considering, too, that refinance activity has been significantly curtailed by the rise in mortgage rates.

Doug Duncan

Fannie Mae Senior Vice President and Chief Economist

What does this mean for you and your clients?

The higher the federal-funds rate goes, with one Fed hike after another, the greater the risk of it going too far and sending the economy into a recession. But Fed Chair Jerome Powell stressed the need to bring inflation under control now to avoid an even worse recession later. 

That said, consumers are worried about how the rate hike and continued inflation will affect their buying power in the coming months, not to mention their ability to purchase and finance a home. 

Though we’re not yet seeing the full effects of Fed rate increases, the uncertainty and volatility of the market make it difficult for consumers and businesses to plan for the future. 

Be the resource your clients need to put all this new data into context and to see how it affects them—right now and in the coming months. The more clearly they can see past the daunting headlines, the easier it will be to confidently enter the market, with you at their side.