BAM Key Details: 

  • Despite mixed data complicating macroeconomic forecasts, Fannie Mae’s ESR Group believes a modest recession is still the most likely result of the Fed’s continued rate hikes—especially given how intent the latter is on getting inflation down to 2%. 
  • With continued strength in the labor market, the Fed will probably continue raising the federal funds rate until it sees clear evidence that the labor market no longer carries the threat of a rebound in inflationary pressures. 

Fannie Mae has issued its June 2023 Commentary with an emphasis on the mixed data that has muddled macroeconomic forecasts across the board. 

Given the resilience of the labor market and persistent buyer demand, along with current financial conditions, the ESR Group has upgraded its 2023 GDP forecast to 0.1% from a negative 0.3% on an annual (Q4/Q4) basis. 

It also downgraded its 2024 forecast to 0.8% from 1.2%, reflecting a shift in the expected start of the modest recession, which the Group still expects as a result of the Fed’s tightening monetary policy. 

Inflation has cooled since the Fed first began its series of rate hikes. From April to May, the annual pace of inflation slowed from 4.9% to 4%. ESR Group economists expect a further decline to a little over 3% in the coming months. 

That said, they also believe continued strength in the labor market may cause a rebound in inflationary pressures if the Fed backs off too quickly. 


Source: Fannie Mae

Drawing from lessons learned from the 1970s and 80s, the Group expects the Fed to continue its efforts to subdue inflation (and with it the labor and housing markets) until they see clear evidence that those inflationary pressures have eased, 

Unfortunately, based on the timing of data releases, such evidence is unlikely to manifest until recession is already inevitable—which means the question of an economic downturn is more a matter of “when” than “if.” 

Lack of inventory props up home prices and supports new construction

The spring 2023 homebuying season, which typically brings more homes to the market, did little to counter the downward trend in housing inventory

Record lows for new listings have propped up home prices in recent months and boosted new construction, which now represents a larger share of total inventory. 

Assuming a modest recession is inevitable, the ESR Group expects housing starts to decline in coming quarters. If, on the other hand, we somehow avoid a recession, the Group sees substantial upside risk to its forecasts for new home sales and starts. 

Core inflation remains sticky, having not fallen as rapidly as other price measures, creating upside risk to the fed funds rate, as noted in the Federal Reserve’s Summary of Economic Projections, and making it likely in our view that it maintains a restrictive posture for longer than most market participants initially anticipated. Meanwhile, housing prices continue to show stronger growth than what was previously expected given the suddenness and significant magnitude of mortgage rate increases. Housing’s performance is a testimony to the strength of demographic-related demand in the face of Baby Boomers aging in place and Gen-Xers locking in historically low rates, both of which have helped keep housing supply at historically low levels. Homebuilders continue to add to that supply, but years of meager homebuilding over the past business cycle means the imbalance will likely continue for some time. We do expect housing will be supportive of the overall economy as it exits the modest recession.

Doug Duncan

Fannie Mae Senior Vice President and Chief Economist

Read the full June 2023 report for more details. 

Takeaways for real estate agents

Aside from staying on top of national trends—with the help of the daily Hot Sheet—and providing relevant data on nationwide changes in the housing market, be prepared with relevant data on your own local market. That way, you can show your clients and prospects the fuller picture of what they’re facing when they come to the market as a buyer or seller. 

Gather insights from the most reliable sources—including bearish Fannie Mae and bullish Zillow—to present that fuller picture as objectively as possible.