BAM Details:

  • The Fannie Mae ESR Group reports a strong start in 2023 for the economy and housing market and no longer expects a recession in Q1. 
  • Recent data releases suggest further weakness ahead as consumer spending outpaces income and a January rebound in inflation points to more aggressive action from the Fed.

The Fannie Mae ESR Group has reported a stronger-than-expected start in 2023 for the U.S. economy and housing market. 

But with the rate of disinflation also slower than expected, and with the fuller picture of recent developments growing clearer, it anticipates continued aggressive action by the Federal Reserve and a modest recession starting in the second quarter. 

The strong start in January could be part of the reason why Fannie Mae expects this year to end on a less enthusiastic note. 

Read on to learn Fannie Mae’s revised forecast for the 2023 housing market. 

The economy & housing market are off to a better-than-expected start

Recent data releases show the rate of disinflation has been slower than expected, with January showing a rebound in the inflation rate. 


Source: Fannie Mae

Retail sales and manufacturing output growth have also exceeded expectations, presenting a considerable upside risk to the ESR Group’s forecast for the first quarter. 

Current data points to a stronger-than-expected start for the economy and housing market in 2023. The past weeks have witnessed a blowout employment report for January, along with substantial upward revisions to recent inflation data

While the ESR sees good reason to partially chalk up the strength of these figures to ongoing post-pandemic anomalies and abnormal weather, it now seems more likely the recession will start in the second quarter of 2023 rather than the first. 

Also, the stronger set of data for the economy increases the likelihood that the Federal Reserve will maintain an aggressive policy for a longer time. 

Interest rate futures markets have adjusted and now point to a terminal federal funds rate of 5.5% by the middle of 2023, with only a single cut by the year’s end. 

While abnormal seasonal consumption and hiring/layoff patterns could be overstating the strength of the overall economy, data releases suggest an easing in financial market conditions to kick off 2023. 

Labor market exceeds ESR expectations

Employment gains in January vastly exceeded both ESR Group and consensus expectations, with reports logging an addition of 517,000 jobs—reversing a five-month streak of job growth deceleration. 

Job gains from June to December were revised upward as a result of the Bureau of Labor Statistics’ (BLS) annual benchmarking process, growing by a cumulative 381,000 jobs, indicating a stronger job market moving into 2023 than previously thought. 

Fannie-Mae-Revised data-stronger-labor-market-chart

Source: Fannie Mae

While the data behind that strength is consistent with easing financial market conditions at the beginning of the year—including the recent pullback in gasoline prices and annual inflation adjustments to tax brackets and social security benefits—the ESR Group has decided to partially discount that strength in their revised forecast. 

They suspect some of the gains are due to anomalies like unseasonably warm weather over much of January as well as the difficulty in calculating the correct seasonal adjustments around the holiday period. 

Hence their decision, given ongoing post-pandemic deviations from traditional seasonal patterns of both hiring/layoffs and consumption, they suspect at least some of the reported strength in January can be written off as “seasonality quirks.”

It’s also worth mentioning that the ADP alternative measure of employment showed a gain of only 106,000 jobs over the month of January. And continuing employment claims are still on a modest upward trend. 

Other authoritative employment measures also point to subdued hiring patterns. And while the monthly data for January has been stronger than expected, quarterly figures and three-month moving averages paint a more subdued picture of the overall economy.

GDP growth and manufacturing output

Headline GDP growth in the final quarter of 2022 came in at 2.9%, which was a little higher than Fannie Mae’s research group expected. But this growth is almost entirely attributable to a surge in inventory investment and a fall in imports. 

A more revealing measure when it comes to the underlying growth trend is real final sales to private domestic purchasers (consumption and private fixed investment), which came in at a 0.2% annualized growth rate—the slowest since the start of the pandemic. 

Also, despite its bump up in January, manufacturing output, as measured by the Federal Reserve Board’s industrial production report, has remained near recessionary levels and reached its lowest level in December since October 2021. 

Recent data suggests the strong start will lose steam by the second quarter

Thanks to the following economic headwinds, the ESR Group still expects a modest recession in 2023, but they’ve now pushed the likely start date to the second quarter rather than the first:

  • Unsustainably high consumer spending (relative to income)
  • Significant drops in monetary aggregates
  • An increasingly inverted yield curve
  • Persistent inflationary pressures

While a soft landing is possible, the Group doesn’t expect one, mainly due to the high levels of personal consumption, which points to an eventual spending retrenchment. 

Because the more people spend, the higher consumer debt is likely to climb, making it increasingly more difficult to pay for necessities, let alone save any of their income. 


Source: Fannie Mae

Negative monetary aggregates are a phenomenon that, historically, has pointed to a coming recession. For more details on economic indicators pointing to that outcome, read the full report

What the ESR Group expects from the Federal Reserve

A slew of recent data suggests the rate of disinflation has lagged behind expectations. And with January’s uptick in the inflation rate, the Fed is more than likely to raise the federal funds rate a minimum 25 basis points at their next meetings in March and May—and possibly July, too. 

The longer they keep rates higher, the greater the risks to the economy and financial stability, as well as to the housing market, as mortgage rates could climb beyond 7%, impacting both buyer demand and seller activity with predictable consequences for home sales and prices. 

It’s also worth noting that the more aggressively the Fed raises its federal funds target, the more likely we are to see a more severe economic downturn from a weak point somewhere in the global financial system cracking under the pressure. 

Fannie Mae’s revised expectations for the 2023 housing market 

With the pullback of roughly 100 basis points in mortgage rates since last November, 2023 started on a relative high note, with buyers returning to the market, encouraged by the prospect of saving hundreds of dollars a month on their mortgage payment. 

That said, the ESR Group expects this rallying of buyer demand to prove temporary. Rates have since climbed back up to 6.87% as of February 22nd. 

Homeowners now have even less financial incentive to sell, especially those locked into mortgage rates around 3%, which will continue to limit new listings and overall home sales. 

On top of that, the 10-year Treasury has increased significantly in recent weeks, pointing to a stronger likelihood of rising mortgage rates. And the higher they climb, the more we’re likely to see a cooling in buyer demand. 

The Group also expects to see a softening in housing starts activity, as builders are likely to prioritize finishing the elevated number of homes already under construction over breaking new ground for new starts. 

With recent data for mortgage applications coming in stronger than expected, they now forecast total 2023 home sales to reach 4.67 million units, up from their previous forecast of 4.52 million. Even with that adjustment, this would be the slowest annual pace of home sales since 2011. 

They’re forecasting a partial rebound in 2024, with total home sales rising 9.6% to 5.12 million units as the overall economy recovers. It’s still a pace well below recent years, thanks to affordability challenges, which could remain elevated well into next year. 

The ESR Group’s outlook for this year’s overall single-family mortgage originations is $1.69 trillion, followed by $2.03 trillion in 2024, down from their estimated 2022 volume of $2.36 trillion.

Recent data have been stronger than expected in ways that we believe are likely to lead to tighter monetary policy with attendant increases in interest rates. While some optimism appears to have crept into the housing sector, it represents an increase from very low levels of activity and is at risk of declining again if rates reverse. Right now, it’s difficult to ascertain whether COVID-induced consumer behavior changes and business practices are altering seasonal data adjustments, or if the real underlying economic activity is as strong as some recent economic indicators suggest. While we now believe the expected economic downturn will not start until the second quarter of 2023, we still think a mild recession is in the cards.

Doug Duncan

Fannie Mae Senior Vice President and Chief Economist

Top takeaways for real estate agents

We can guess, at this point, that higher mortgage rates will sideline more buyers and give homeowners who don’t need to move more financial incentive to stay put. 

For those who can’t afford to wait, look for ways to help them save money on a home purchase or to get the best value from selling their home. 

Always be learning new ways to add value to your interactions with clients, prospects, and anyone with questions about the housing market.