BAM’s Key Details: 

  • Per Fannie Mae’s updated 2023 housing market forecast, the economy will enter and exit a modest recession in 2023, followed by a rebound in 2024
  • Housing sales are expected to hit a trough in Q2 2023 before rebounding 
  • The ESR group expects the federal funds rate to top out at 5.0% in early 2023

Fannie Mae’s updated 2023 housing market forecast is now live with a few modest adjustments to its previous forecast

Economists still expect a modest recession in 2023, with a rebound in 2024. And housing sales are expected to hit a trough in the second quarter of 2023 before beginning to rebound. 

Forecasts for GDP and the federal funds rate

After a brief rebound in Q3, real gross domestic product (GDP) is expected to again turn negative in Q4 of 2022, according to the November 2022 commentary by Fannie Mae’s Economic and Strategic Research (ESR) Group. 

The ESR Group also expects a modest recession in the first quarter of 2023. 

GDP growth for 2022 is now expected to be 0.0%, an upgrade of one-tenth from the previous forecast. Forecasted GDP growth for 2023 was downgraded by one-tenth to a 0.6% contraction. 

Also, the ESR Group’s forecast for 2024 shows GDP growth rebounding to 2.0% on a Q4/Q4 basis, reflecting the start of an expected economic recovery. 

On a related but less optimistic note, while inflation showed signs of cooling in October, Fannie Mae expects the Federal Open Market Committee (FOMC) will again raise the federal funds rate at its next meeting—and that the rate will top out at about 5.0% in early 2023. 

Forecasts of total single-family home sales

After modest updates, total single-family home sales for 2022 and 2023 are projected to be 5.67 million and 4.42 million, respectively. In 2024, sales are expected to rebound 18.6% from the previous year to 5.25 million, thanks to the following: 

  • An anticipated modest decline in mortgage rates
  • The broader projected economic recovery
  • A continued shortfall in housing inventory that should support new home construction

A major contributor to the ESR Group’s somewhat pessimistic outlook on home sales is the “lock-in effect,” so named because many homeowners have a strong financial disincentive to move because the rate on their current mortgage is well below today’s rate. 

The ESR Group estimated that, as of the end of October, more than 80% of borrowers—by far the largest share in decades—had a mortgage rate at least 200 basis points below today’s mortgage rates. 

As fewer existing homeowners put their homes on the market, first-time buyers may increasingly turn to new construction. And as the number of move-up buyers declines relative to past cycles, homebuilders may focus more on comparatively modest homes to attract more first-time buyers.

New home vs. existing home sales

In the near future, the ESR group expects new home sales to continue slowing down. As expected, sales fell in September by 10.9%, following a 24.7% surge in August, largely thanks to the temporary pullback of mortgage rates. 

But with mortgage rates climbing back up since then, economists expect new home sales to continue its (mostly) downward trend. 

As overall buyer demand declines, homebuilders are increasingly adding to their inventories of homes for sale, including homes that are under construction or completed. 

With the growing divergence of supply and demand, it’s reasonable to expect more aggressive discounting and other buyer incentives as homebuilders try to move available inventory. 

Given that, the ESR group projects new home sales to hold up well relative to existing sales in the coming quarters. 

Forecasts for mortgage originations

Along with minor revisions to forecasts for home sales and mortgage rates, Fannie Mae’s forecast for mortgage originations has also seen a slight adjustment. 

  • For 2022 — $1.64 trillion in single-family purchase mortgage originations
  • For 2023 — $1.34 trillion, down 18.5% year over year
  • For 2024 — returning to $1.57 trillion as home sales are expected to rise again. 

For single-family refinance originations, Fannie Mae economists now expect—

  • For 2022 — $699 billion
  • For 2023 — $375 billion
  • For 2024 — $538 billion, as mortgage rates are expected to decline (somewhat) over the year. 

The economy continues to slide toward a modest recession, which we anticipate will begin in the new year, with housing leading the slowdown. Higher interest rates have ignited the typical reduction in residential fixed investment, which historically has led into either an economic slowdown or recession. From our perspective, the good news is that demographics remain favorable for housing, so the sector appears well-positioned to help lead the economy out of what we expect will be a brief recession.

Doug Duncan

Senior Vice President and Chief Economist, Fannie Mae