Fannie Mae: The housing market recession isn’t over yet – and soon it will help spur a ‘mild’ recession in the US

Fannie Mae says a tightening of credit for construction lending will see home starts fall further Getty Images

The US housing market has stabilized, say the real estate speculators. New home sales are on the rise again, as strong construction incentives attract buyers back into the market. Meanwhile, mortgage rates fell below 7%, along with the housing market entering the busiest spring season, causing many regional housing markets to shift from correction mode to growth mode. In reality, Only 16% of the regional housing markets Tracked by Zillow, house prices fell between March and April.

When it comes to housing, the worst is behind us. or is it?

The housing market recession is not over yet – and it could regain momentum as the market transitions into the seasonally slower summer and fall months. At least that’s according to a revised forecast just released by Fannie Mae.

During the first quarter of 2023, US housing market activity as measured by private residential fixed investment (i.e. the core housing GDP), declined, on a nominal basis, for four consecutive quarters. And more contractions could be on the horizon. In fact, Fannie Mae expects fixed residential investment to decline in Q2 2023 (-5.9%), Q3 2023 (-9.1%), Q4 2023 (-6.4%), and Q1 2024 (-1%). ).

“There is a record number of multi-family units currently under construction, which are scheduled to come online later this year and into 2024. Along with a tightening of credit for construction lending, which we expect to materialize soon through a slower new project pipeline, We anticipate a significant slowdown starting later this year,” wrote economists Fannie Mae in their report published Friday.

According to Fannie Mae’s forecasts, the decline on the multi-family side will negate any economic boost created on the single-family side, which benefited this spring from construction incentives such as mortgage rate buys.

Over the past year, the housing market has been one of the few areas of the economy stuck in a recession. That may change soon: Fannie Mae’s forecast model believes that the downturn in the US housing market will extend and help push the US economy into recession. In fact, Fannie Mae expects US GDP to decline in Q3 2023 (-1.2%), Q4 2023 (-1.7%), and Q1 2024 (-0.5%).

“A modest recession is the likely outcome — and its timing remains the key outstanding question — as the Fed is likely to maintain a more hawkish policy for longer if wage-related inflationary pressures do not abate,” the economists at Fannie Mae wrote.

While Fannie Mae’s projection model predicts that the US housing market will help drag the economy into a recession, Fannie Mae economists also believe that the US housing market will act as a buffer against a deep recession.

“We see conditions in the housing and auto sectors as likely a buffer to the severity of the recession by being potential drivers of eventual recovery rather than a means of preventing it,” economists at Fannie Mae wrote on Friday.

View where Fannie Mae expects us to have home prices in the 2024 chart

What does this mean for home prices?

Unlike Zillow and CoreLogic, which expect modest home price gains over the next year, Fannie Mae believes the home price correction will soon regain momentum. Fannie Mae’s forecast model has U.S. house prices, according to the Fannie Mae Home Price Index, falling 1.2% between Q4 2022 and Q4 2023, and then another 2.2% decline between Q4 2023 and Q4 2024 If these declines bear fruit, it marked the first annual declines measured by the Fannie Mae Home Price Index since 2012.

By the time national house prices decline in the fourth quarter of 2024, Fannie Mae expects US house prices to be 5.28% lower than the peak in the second quarter of 2022. Regionally, results are likely to vary a lot.

This forecast is a moderate correction – not a collapse in the housing sector.

The reason Fannie Mae says a collapse in national house prices is unlikely is a lack of resale inventory. In fact, active inventory is still 40% below pre-pandemic levels.

“Although mortgage rates are still high compared to a few years ago, an acute housing shortage remains supportive of home prices. Of course, the shortage of homes for sale is currently exacerbated by the so-called ‘lock-in effect,'” he wrote. Doug Duncan, chief economist for Fannie Mae, said in a recent report: “It continues to discourage huge numbers of families with low mortgage rates from listing their homes.”

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