2023’s Resilient Economy Expected to Slow Next Year

Fannie Mae’s Economic and Strategic Research (ESR) Group has released its December 2023 commentary on the state of the economy and has predicted single-family home sales have likely bottomed out in the fourth quarter of 2023—in part due to a pullback in mortgage rates—but should meaningfully recover over the course of the next year. This uptick in home sales should also match an upward trend in originations. 

Looking at another key statistic, purchase mortgage applications have rebounded approximately 15% from their November trough, a trend that the ESR Group expects to continue if mortgage rates continue to fall. 

However, the same dynamics that kept home sales in 2023 at their lowest level since the Great Financial Crisis, including affordability challenges, the lock-in effect, and a lack of homes available for sale, will likely persist in 2024. As such, the ESR Group expects the home sales recovery to be meaningful but slow. 

The ESR Group also continues to forecast a modest downturn in 2024, followed by a return to growth in 2025, noting that many of the underlying business cycle dynamics that contributed to last year’s recession call remain. While the likelihood of a soft landing has certainly improved over the last few months, engineering it while avoiding a resurgence in inflation will likely be a difficult task. 

“Last week’s comments by Chairman Powell, as well as the Federal Reserve’s updated Summary of Economic Projections, suggest increased Fed confidence that a soft landing has been achieved and inflation is headed sustainably to 2%,” said Doug Duncan, Fannie Mae SVP and Chief Economist. “Clearly, the many economic forecasters who previously forecasted a recession beginning in 2023 were wrong, including us. However, we continue to think there are reasons for concern that will likely lead to a mild economic downturn, including stretched consumer spending relative to personal incomes and the continued effects of restrictive monetary policy still working through the economy. Although we expect headline growth to clock in at 2.6% in 2023—above what is generally considered to be the economy’s long-term growth potential of 1.8%—we’re also forecasting slightly negative growth in 2024.” 

Duncan continued: “Notwithstanding the recent mortgage rate rally, housing and mortgage markets will enter 2024 at approximately the same level as they entered 2023. Thus, while we think home sales will start to rise over the new year, the combination of modest increases in home prices and still-elevated interest rates suggest a slow pace of recovery from previously recessionary levels of housing activity.”

Click here to view Fannie Mae’s commentary in its entirety.