What the Newest Fannie Mae Forecast Tells Us About the Impact of Bank Failures

With the U.S. economy showing stronger-than-expected growth, Fannie Mae’s Economic and Strategic Research (ESR) Group has issued an updated forecast for the first quarter of 2023. 

Thanks to a resilient job market, high consumer spending, and still elevated core inflation measures, the newest Fannie Mae forecast raises the expected GDP for Q1 2023 and pushes the expected recession into the second half of the year. 

A previous forecast was finalized before the recent bank failures. While these don’t change the ESR Group’s general expectations for 2023, it has somewhat modified the timeline. 

According to its latest monthly commentary, “many typical recessions have historically included bank failures as an attribute.” So, the recent collapses of Silicon Valley Bank (SVB) and Signature Bank, along with the current struggles of Credit Suisse, may only confirm ESR Group predictions, foreshadowing greater challenges ahead. 

Here’s what you need to know. 

Recent bank failures could foreshadow or even contribute to recession

While the ESR Group isn’t surprised by the failures of high-risk banks, given the broader picture of today’s economy and the Fed’s rate hikes in response to inflation, those collapses are more adjacent to than responsible for the larger issues leading to recession.  

Whether the bank failures, combined with efforts to shore up the banking sector, could nudge the economy closer to recession remains to be seen. But turbulence in that quarter doesn’t fundamentally change the ESR Group’s baseline outlook for 2023-2024. 

If anything, it confirms it, since banks involved in high-risk transactions are particularly vulnerable during times of monetary policy tightening. 

So, the recent bank failures, combined with their impact on consumer confidence in banks and overall tighter lending standards, could tip the already wavering economy into recession. Or they could just come along for the ride. 

Inflation has now been joined by financial stability concerns as threats to sustained growth. These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening—but this may well be the catalyst for the modest recession we’ve been expecting since April 2022. While housing writ large has responded to the Fed’s monetary tightening in a relatively predictable fashion, the rapid uptick in home sales in response to modest rate declines earlier this year corroborates our long-standing expectation that the housing sector will help moderate any future recession due to the significant pent-up demand.

Doug Duncan

Senior Vice President and Chief Economist, Fannie Mae

What these bank failures are not is a sign we’re about to experience a repeat of the Great Financial Crisis of 2008. 

Less like 2008–More like the 80s

Fannie Mae’s ESR Group made a point of arguing against the idea that we’re heading into a repeat of the 2008 Financial Crisis. While some observers are drawing parallels between the recent bank failures and the 2008 crisis, the shared liquidity crises are where the similarity ends. 

Today’s market doesn’t have the underlying problems that created the 2008 Financial Crisis. Credit is not deteriorating, and the banking system is far less leveraged (and less vulnerable) than in 2008. Today’s turbulence in the banking sector is due mainly to last year’s rapid rise in interest rates, as well as other factors caused by monetary policy tightening and depositors seeking higher yields. 

The ESR Group sees a greater similarity between the current economy and the Savings & Loan Crisis of the 1980s, specifically with regard to interest rate hikes, which put additional strain on the banking system and ultimately led to a modest recession in 1991. 

Back then, aggressive monetary policy tightening drove the federal funds rate to nearly 20% in the early 80s. As a result, many banks were unable to attract deposits, while available funding came with rates above what they could bring in, eventually draining their capital. 

Also, similar to today, any financial institution looking to raise cash through loan sales would have had to swallow some big losses even if credit performance was strong. Over a decade’s time, the cumulative effect on the GDP of attempts to shore up the banking system eclipsed every period in history except the Great Depression. 

Despite that, banking sector woes were only partially responsible for the recession in ‘91. And the ESR Group expects a similar outcome this time around. 

While the bank collapses, combined with the efforts taken to shore up the banking sector and preserve (or restore) consumer confidence, could contribute to the recession, they’re unlikely to bring about a crisis like the one we faced in 2008. 

February’s bump in home sales is likely temporary

While home sales surged in February in response to a decline in mortgage rates, the ESR Group points to recent mortgage application data as evidence the past month’s surge in home sales is likely to be short-lived. 

Another factor to consider is the impact of ongoing instability in the banking sector on the availability of jumbo mortgages and residential construction loans, since a large share of those loan originations stems from small and mid-sized banks. 

Home sales are likely to remain subdued thanks to ongoing affordability challenges and the “lock-in effect,” which contributes to low inventory levels. 

Overall impact on the housing market

The updated forecast from Fannie Mae includes an upward revision of the Q1 2023 real gross domestic product (GDP) estimate and an extension on the expected onset of the recession into the second half of the year, rather than the second quarter. 

Despite the adjusted timeline, leading indicators still point to an economic contraction in the near future, with a retrenchment in personal consumption and a rise in the unemployment rate. As it stands now, consumer spending relative to income is unsustainable. 

Here are the top takeaways for key economic and housing market indicators: 

• Q1 2023 GDP is now expected to grow an annualized 0.9%, up from the previously expected contraction of 0.4%
• On a Q4/Q4 basis, the forecast for GDP growth in 2023 has been upgraded to a negative 0.3% from a negative 0.5%, while the 2024 growth forecast has been downgraded to 1.2% from 1.8% to reflect the delayed recession. The projected peak-to-trough decline is similar to the previous forecast. 
• The unemployment rate is expected to trend upward mid-year and end 2024 above 5%.
• Total home sales have been revised upward for Q1 2023 but are expected to contract later in the year, declining 18.4% from the 2022 total (compared to the previously forecast decline of 17.6%), followed by a moderated rebound in 2024, with homes increasing by 7.1% for the year (down from the previously forecasted uptick of 9.6%). 
• Single-family mortgage originations have also been downgraded to $1.55 trillion for 2023 (compared to the previously forecasted $1.69 trillion) and to $1.89 trillion for 2024 (down from the previously forecasted $2.03 trillion). 
• Construction activity may slow down, since loans for both single-family and multi-family construction, as well as commercial construction, are heavily financed by regional and community banks that specialize in these areas. 
• Mortgage rates will likely pull back as the 10-year Treasury falls, which could get more buyers off the sidelines this spring. 

It’s worth noting here that the ESR Group’s interest rate forecast preceded the recent bank failures and thus does not reflect the drop in long- and intermediate-term interest rates following those events, which have already had an impact on mortgage rates and could also affect home sales and mortgage originations. 

Read the full updated forecast to learn more. 

Top takeaways for real estate agents

Knowing what’s going on in the market is important, but to make it useful to your clients, you need to be able to articulate how today’s market conditions are likely to affect them. 

If you can’t provide clear and actionable advice to help your client save money on a home purchase or sell their home at the price they want, all the market savvy in the world won’t help you grow your business. 

Learn what your clients need from you, devour the data and information that will help you provide that, and develop your ability to articulate the most valuable takeaways. 

The higher the quality of your information sources, the easier that becomes.