The rapid rise in long-term interest rates over the past few months will likely weigh on future economic growth, according to the October 2023 commentary from the Fannie Mae Economic and Strategic Research (ESR) Group.
The ESR Group warns that an acute credit event (a change in a borrower’s ability to pay their debt) is more likely now that interest rates are moving rapidly again. Even in this event, however, the group warns that low-interest debt will continue to be rolled into higher rates, which will adversely weigh on consumption, hiring, and investment.
The ESR Group also found a positive sign: national accounts showed higher consumption and income than previously reported. This indicates the economy might be in a better place moving forward than anticipated.
Combining this data, the ESR Group revised upward its 2023 real GDP projection by three-tenths to 2.5% on a Q3/Q4 basis. However, the group still expects significant slowing in economic growth through the end of the year and into 2024.
Looking specifically at the home market; mortgage rates are now well over 7% and home prices have proven more resilient than expected. The ESR Group thus revised its 2023 home price forecast upward from 3.9-6.7% on a Q3/Q4 basis.
However, the group also predicts home prices will decelerate come 2024. Will this mean more sales? Not necessarily, for the ESR group predicts the annualized pace of existing home sales to fall below 4 million units in the fourth quarter.
“Personal consumption has not only remained resilient, but recent official data revisions indicate that the consumer has been in a better position than previously thought, increasingly the likelihood of an economic ‘soft landing,'” said Doug Duncan, Fannie Mae senior vice president and chief economist. “However, despite consumer resiliency, the recent rise in interest rates has been precipitous, and in past environments – even with less severe interest rate shocks – this has led to economic dislocations. As such, we still expect to see a mild economic downturn in the first half of 2024. While the rate of inflation has slowed and continues to slow, we continue to take the Federal Reserve at its word that rates will be ‘higher for longer’ until annual inflation stabilizes at the two-percent target; though at this time, in part because of the recent run-up in long-term rates, we do not expect additional Fed rate hikes.”
Duncan continued: “In many ways, the housing market experienced four years of business in a two-year period between mid-2020 and mid-2022. With ongoing affordability constraints and rising mortgage rates, much of that activity has essentially been given back. We expect the higher mortgage rate environment to continue to dampen housing activity and further complicate housing affordability into 2024.”
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