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According to the NAHB, Fannie Mae, The Mortgage Bankers Association and NAR, a “mild to moderate” recession began during the first quarter of 2022 and continued with a GDP decline during the second quarter, according to chief economist Robert Dietz. As a result of “aggressive monetary policy tightening” from the Federal Reserve, further declines are projected in the near-term future as a result of Fed Tightening Policy.
According to the NAHB, Fannie Mae, The Mortgage Bankers Association and NAR, a “mild to moderate” recession began during the first quarter of 2022 and continued with a GDP decline during the second quarter, according to chief economist Robert Dietz. As a result of “aggressive monetary policy tightening” from the Federal Reserve, further declines are projected in the near-term future as a result of Fed Tightening Policy.
ECONOMIC OUTLOOK: RECESSION, HOUSING DEMAND CONTRACTION, HOME PRICE DECLINES EXPECTED IN 2023
Single-family home starts and sales are projected to decline in 2023, while mortgage rate levels are projected to decline in the latter half of the year.
A combination of economic factors, including high inflation and monetary policy tightening, will push the economy into a recession in 2023, according to projections from economists with Zonda, the NAHB, Fannie Mae, and the Mortgage Bankers Association (MBA). Zonda chief economist Ali Wolf says a recession will encompass a broad slowdown across the economy and national job losses. While the technology and real estate industry sectors—particularly lenders—have been most impacted and are slowing more than other sectors of the economy, there are expectations job losses will spread more broadly.
“We think that the Federal Reserve’s actions to keep the economy under control will result in slower economic growth across other sectors as well,” Wolf says. “That is by design, the Federal Reserve knows what they’re going to have to do will slow the economy and potentially push it into a recession.” The MBA’s baseline forecast is for mortgage rates to end 2023 at around 5.4%. Dietz believes rates will be between 7% and 8% in the first quarter of 2023.
“We think that the Federal Reserve’s actions to keep the economy under control will result in slower economic growth across other sectors as well,” Wolf says. “That is by design, the Federal Reserve knows what they’re going to have to do will slow the economy and potentially push it into a recession.” The MBA’s baseline forecast is for mortgage rates to end 2023 at around 5.4%. Dietz believes rates will be between 7% and 8% in the first quarter of 2023.
Severity of Recession Tied to the Fed
For the NAHB, a “mild to moderate” recession began during the first quarter of 2022 and continued with a GDP decline during the second quarter, according to chief economist Robert Dietz. As a result of “aggressive monetary policy tightening” from the Federal Reserve, further declines are projected in the near-term future. Fannie Mae’s Economic and Strategic Research Group projects GDP to contract 0.7% annualized in the fourth quarter and to remain negative through the third quarter of 2023.
“We are forecasting GDP declines for the final quarter of 2022 and the first half of 2023. The official recession scorekeeper, the National Bureau of Economic Research, will wait until data shows a definitive rise for the unemployment rate and then designate some part of 2022–2023 as an official recession,” Dietz says. “Future labor market data will show such an increase [in the unemployment rate] in early 2023.”
Mike Fratantoni, chief economist and senior vice president of research and industry technology for the MBA, says the association projects the unemployment rate will increase from its current rate of 3.5% to 5.5% by the end of 2023.
Dietz says a risk of a more severe recession “is tied directly to the Fed tightening policy too much, such as raising the short-term federal funds rate well above 5%.” Both the NAHB and the MBA forecast inflation will reach the Federal Reserve’s 2% target in 2024.
“However, the policy tightening necessary to reduce inflation is now present in the system and requires patience from the Fed to work,” Dietz says. “The risk is now that the Fed tightens too much and brings on a more severe downturn.”
“We are forecasting GDP declines for the final quarter of 2022 and the first half of 2023. The official recession scorekeeper, the National Bureau of Economic Research, will wait until data shows a definitive rise for the unemployment rate and then designate some part of 2022–2023 as an official recession,” Dietz says. “Future labor market data will show such an increase [in the unemployment rate] in early 2023.”
Mike Fratantoni, chief economist and senior vice president of research and industry technology for the MBA, says the association projects the unemployment rate will increase from its current rate of 3.5% to 5.5% by the end of 2023.
Dietz says a risk of a more severe recession “is tied directly to the Fed tightening policy too much, such as raising the short-term federal funds rate well above 5%.” Both the NAHB and the MBA forecast inflation will reach the Federal Reserve’s 2% target in 2024.
“However, the policy tightening necessary to reduce inflation is now present in the system and requires patience from the Fed to work,” Dietz says. “The risk is now that the Fed tightens too much and brings on a more severe downturn.”
Mortgage Rate Volatility Continues
The efforts to combat inflation are closely related to mortgage rates, which have risen to levels surpassing 7% in the latter months of 2022. Jessica Lautz, vice president of demographics and behavioral insights for the National Association of REALTORS (NAR), says the rise in rates has contributed to an approximate increase of $1,000 per month on mortgage payments, pricing out many buyers, particularly first-time home buyers, and contracting demand.
Fratantoni forecasts that as the economy begins to slow, long-term rates, including mortgage rates, will fall from current peak levels. However, some volatility is expected in the near-term future due to quantitative tightening by the Federal Reserve and other central banks. The MBA’s baseline forecast is for mortgage rates to end 2023 at around 5.4%. Dietz believes rates will be between 7% and 8% in the first quarter of 2023 as the Federal Reserve continues its tightening policies, but rates will ease later in 2023 due to slower economic growth and expected Fed easing “to more normalized monetary policy.”
While rates remain difficult to forecast, Wolf says builders in the housing market have found success when evaluating how rates, and home prices, have changed over the calendar year and offering adjustments to incentivize potential buyers. Such success suggests the existence of price elasticity and many consumers wanting to purchase homes but unable to at current prices or mortgage rates.
“We have found that builders that adjust their price or offer some kind of rate buydowns to get the payment close to the beginning of this year have found great success in the market,” Wolf says.
Fratantoni forecasts that as the economy begins to slow, long-term rates, including mortgage rates, will fall from current peak levels. However, some volatility is expected in the near-term future due to quantitative tightening by the Federal Reserve and other central banks. The MBA’s baseline forecast is for mortgage rates to end 2023 at around 5.4%. Dietz believes rates will be between 7% and 8% in the first quarter of 2023 as the Federal Reserve continues its tightening policies, but rates will ease later in 2023 due to slower economic growth and expected Fed easing “to more normalized monetary policy.”
While rates remain difficult to forecast, Wolf says builders in the housing market have found success when evaluating how rates, and home prices, have changed over the calendar year and offering adjustments to incentivize potential buyers. Such success suggests the existence of price elasticity and many consumers wanting to purchase homes but unable to at current prices or mortgage rates.
“We have found that builders that adjust their price or offer some kind of rate buydowns to get the payment close to the beginning of this year have found great success in the market,” Wolf says.
Decline of Home Sales and Prices
Due to projected job losses and related faltering consumer confidence, Wolf says Zonda projects home sales will decline further in 2023. Fannie Mae downwardly revised its forecast for total single-family home sales in 2023 to 4.47 million, which would represent an annual decline of 20.8%. After seeing eight consecutive months of contracting real estate home sales, the NAR forecasts a 7% year-over-year decline of existing home sales in 2023.
In addition to declining home sales in 2023, many economists forecast home prices will respond by slowing their pace of growth. Due to continued limited inventory, the NAR projects existing home prices will marginally increase by 1%, while the MBA forecasts national home prices will be “roughly flat” in 2023. The MBA does project many local markets will experience home price declines, though. Fannie Mae has revised its projection from price growth of 4.4% nationally in 2023 to home price declines of 1.5%.
On a national basis, Wolf projects home prices will decline 15% in 2023. Dietz says the NAHB projects home declines will approach 10% on a national basis next year due to weakness in single-family construction and eventual declines for multifamily development.
“We should see home price declines not only for market dynamics, but it also will help the market get back in line with something that’s more healthy and more reasonable,” Wolf says. “Even big drops in home prices, because we had such a run-up of home prices during such a short period of time, is not as impactful in terms of causing a massive housing collapse, as what we saw during last cycle.”
In addition to declining home sales in 2023, many economists forecast home prices will respond by slowing their pace of growth. Due to continued limited inventory, the NAR projects existing home prices will marginally increase by 1%, while the MBA forecasts national home prices will be “roughly flat” in 2023. The MBA does project many local markets will experience home price declines, though. Fannie Mae has revised its projection from price growth of 4.4% nationally in 2023 to home price declines of 1.5%.
On a national basis, Wolf projects home prices will decline 15% in 2023. Dietz says the NAHB projects home declines will approach 10% on a national basis next year due to weakness in single-family construction and eventual declines for multifamily development.
“We should see home price declines not only for market dynamics, but it also will help the market get back in line with something that’s more healthy and more reasonable,” Wolf says. “Even big drops in home prices, because we had such a run-up of home prices during such a short period of time, is not as impactful in terms of causing a massive housing collapse, as what we saw during last cycle.”
A Slowdown Doesn't Mean Collapse
“While the housing market will feel pain through 2023, it is important to note this is not 2007–2010. There is a structural housing deficit not a surplus, mortgage underwriting was much more conservative over the last decade, and demographics favor a return for housing demand in 2024 and years thereafter,” Dietz says.
While affordability concerns have kept would-be buyers on the sidelines, price corrections may present more opportunities in the entry-level market. However, Dietz says “real improvement” for housing affordability is unlikely to occur until 2024 and the onset of Fed easing and a retreat of mortgage rates.
While affordability concerns have kept would-be buyers on the sidelines, price corrections may present more opportunities in the entry-level market. However, Dietz says “real improvement” for housing affordability is unlikely to occur until 2024 and the onset of Fed easing and a retreat of mortgage rates.
