The rapid rise in long-term interest rates over the past few months will likely weigh on future economic growth, according to the October 2023 commentary from the Fannie Mae (OTCQB: FNMA) Economic and Strategic Research (ESR) Group. Even barring another acute credit event, which the ESR Group warns is more likely now that rates are moving rapidly again, the turning of the credit cycle is ongoing and, over time, is expected to weigh on consumption, business investment, and hiring as low-interest debt is rolled into higher rates. Still, the ESR Group notes that the economy likely faces fewer structural headwinds than previously thought after significant updates to the national accounts showed real consumption and incomes in better balance than had been reported previously. When combined with other incoming data, the ESR Group revised upward its 2023 real GDP projection by three-tenths to 2.5 percent on a Q4/Q4 basis but continues to expect significant slowing in economic growth through the end of the year and into 2024.
While incoming purchase mortgage application data have highlighted the downside risk to housing activity amid a mortgage rate environment that is now well over 7 percent, home prices have proven more resilient than expected, causing an upward revision to the ESR Group’s 2023 home price forecast from 3.9 percent to 6.7 percent on a Q4/Q4 basis. The ESR Group continues to expect home price growth to decelerate in 2024 as affordability remains extremely constrained. The ESR Group notes that further declines in home sales from an already low level due to the run-up in mortgage rates will likely be muted relative to the slowdown in 2022, but it still predicts the annualized pace of existing home sales to fall below 4 million units in the fourth quarter. New home sales continue to hold up better than existing due to ongoing inventory constraints, though the ESR Group’s forecast calls for a modest deceleration in both new single-family sales and…
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