While the latest data on inflation has provided reason for optimism, less favorable base effects are likely to slow further progress in reducing annual inflation to the preferred 2-percent target, according to the July 2023 commentary from the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group. Given the low rate of productivity gains, wage growth appears to remain too high for inflation to near its target rate anytime soon, and so the ESR Group is forecasting another rate hike later this month and even tighter monetary policy through the end of the year. The ESR Group expects the Consumer Price Index, on an annual basis, to end the year around 3.1 percent, with the core index around 4.3 percent. Following an unusually large upward revision to first quarter 2023 gross domestic product, this month the ESR Group upgraded its expectations for economic growth in 2023 by a full percentage point to 1.1%. However, while noting that the probability of a “soft landing” may have increased of late, the ESR Group continues to expect a modest recession beginning in the fourth quarter of 2023 or the first quarter of 2024.
An extremely limited number of existing homes available for sale continues to be the defining feature of today’s housing market, according to the ESR Group. While total home sales remain near the lowest annual level since 2009, this is not due to lack of demand. Rather, the ongoing lack of inventory, the extent of which exceeded the ESR Group’s earlier expectations, has resulted in significantly stronger home price appreciation than previously anticipated. Dynamics in the existing sales market have been highly supportive of new construction, though, and the ESR Group has significantly upgraded its single-family starts forecast. Still, given the ESR Group’s expectation of slowing economic activity through the end of the year and into 2024, it continues to anticipate slowing home price growth and a slower pace of starts in 2024.
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