A recession could begin sooner than the second half of next year, as Fannie Mae previously forecast, since consumer spending power is increasingly constrained by growing inflation and rapidly rising interest rates, the government-sponsored enterprise said in its latest economic outlook.

It’s now projecting home sales to have a “meaningful slowdown” in the current quarter as well as the next one, followed by a softening in home construction activity and a large deceleration in home price growth.

“Financial conditions have tightened significantly, and the economy is slowing faster than previously expected as markets adjust to the Federal Reserve’s tightening guidance,” Fannie Mae Chief Economist Doug Duncan said in a press release. “The impact to prices of expected reductions in agricultural production, as well as continued increases in house prices, suggest to us a difficult path for the Fed to return inflation to its 2% target rate in a timely manner — and, of course, in the absence of an economic downturn.”

Without some sustained price relief on durable goods, energy, and food in coming quarters — in order for real income growth to return to positive territory — the possibility of a late-2022 recession becomes more likely, Fannie Mae’s commentary added. That will have an effect on housing.

Fannie Mae’s May housing forecast predicts slightly under $2.7 trillion in total volume this year, compared with April’s $2.82 trillion outlook. Last year, the mortgage industry did $4.48 trillion of loans according to Fannie Mae’s calculations.

Duncan cut the purchase outlook to approximately $1.9 trillion from $1.93 trillion one month prior. That means 2022’s volume in this area would only be slightly higher than the $1.88 trillion of purchase volume done in 2021. His home sales forecast (both new and existing) for this year falls to 6.12 million units on a seasonally adjusted annual rate from 6.38 million units one month ago.

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Unlike his counterpart at the Mortgage Bankers Association, Mike Fratantoni, whose latest forecast calls for increased purchase originations over the next two years as well, Duncan believes volume will drop to $1.76 trillion in 2023. Fannie Mae has not issued a 2024 forecast yet.

Refinance volume will go from $2.6 trillion last year to $797 billion this year and $494 billion in 2023, according to the May forecast. Duncan’s April expectations for the refinance market this year was $889 billion in volume; at that time, the outlook for 2023 was for $558 million.

“Historically, rapid and substantial rises in mortgage rates have had the effect of slowing activity, which we reflect in our forecast,” Duncan said. “Not only is the worsening affordability of homes a problem for potential entry-level homebuyers, but current homeowners are less likely to trade in their existing lower-rate mortgages and list their homes for sale, both of which will likely weigh on sales.”

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