Modest Recession Coming?
The Wall Street Journal recently commented on how difficult it will be for the Federal Reserve to tame inflation without inadvertently throwing the economy into a recession. If it raises interest rates too vigorously, it risks causing a downturn where consumers quit spending, businesses quit hiring and economic activity slows to a trickle.
Economists at Fannie Mae–the largest buyer of mortgages, providing liquidity in the home loan market–have now predicted a ‘modest recession’ in 2023 as they expected home sales to fall by 7.4% this year and 9.7% next year. This represents a sharp downgrade from previous estimates and is the result of the Fed’s apparent willingness to raise interest rates more aggressively in the near term.
Higher rates will constrain the ability of first-time homebuyers to qualify for financing and will discourage households enjoying a 3% rate on their current mortgage from moving up to a new home with a 5% rate on the new mortgage. In a hopeful sign for buyers, home price appreciation may cool–prices will still go up, but not as fast.
Notably, no analysts anticipate a recession as deep or as long as the ‘Great Recession’ of 2008-2012, and no one expects home values to fall