Fannie Expects Home Price Decline, But not a Repeat of 2008
Written By: Joel Palmer, Op-Ed Writer
Little has changed from previous economic and housing forecasts one month into the new year.
Fannie Mae released its first economic commentary of 2023 earlier this month. It led off by maintaining its forecast of a modest recession beginning in the first half of the year, despite signs of economic strength at the of last year.
Fannie’s Economic and Strategic Research (ESR) Group said the current rate of consumption is unsustainable relative to disposable income. As a result, consumer retrenchment will contribute to economic contraction.
The ESR Group also expects a cumulative 6.7 percent home price decline over the next two years. Fannie does not, however, anticipate a repeat of the 2008 financial crisis. The commentary points out that many of the factors contributing to the housing market collapse 15 years ago don’t exist today. These include:
Minimal use of adjustable-rate mortgages (ARMs) compared to the years prior to the financial crisis.
Minimal use of teaser rates and exotic mortgage products.
A smaller portion of current single-family borrowers subject to payment shocks from the past year’s rising interest rates than many borrowers were in 2006 to 2008.
More robust mortgage underwriting standards.
More tools available for loan workouts and modifications to minimize mortgage delinquencies and foreclosures.
More room to absorb credit losses due to the residential market and the overall financial system being less leveraged.
“In summary, we do not foresee further downward pressure on home prices as a result of a large number of homes being added to the market through distressed sales and foreclosures,” the report concluded. “Therefore, we believe the spillover effects from housing into the macroeconomy will likely be more limited.”
“There are economic signals pointing to recession but also signs that a ‘soft landing’ may be in the offing,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. “In our view, the balance still suggests a modest recession, particularly if the Federal Reserve maintains its focus on labor market tightness.”
As stated in previous forecasts, Fannie expects 2023 to be a slow year for the housing market.
The forecast for declining home prices caused Fannie to make slight downward revisions on its forecasts for mortgage originations.
Fannie now expects $1.6 trillion in origination volume in 2023, down $61 billion from the previous month’s forecast. This would mark a 30 percent year-over-year decline. The forecast also call for a 20 percent origination rebound in 2024.
Purchase volumes are expected to fall 23 percent in 2023 to $1.28 trillion, a downward revision of $51 billion from the previous forecast. The forecast calls for a purchase originations to grow 11 percent in 2024.
Fannie’s forecast for refinance originations was also revised downward this month. It now expects refinance volumes to be $683 billion in 2022 and $356 billion in 2023, both slight downward revisions from last month’s forecast. In 2024, Fannie expects refi volumes to rebound to $545 billion as mortgage rates gradually decline.
Fannie anticipates mortgage rates will drift downward, ending 2023 a little above 6 percent and 2024 around 5.5 percent.
