As the Federal Reserve attempts to battle surging inflation with hawkish monetary policy, the economy will "most likely" fall into a modest recession in the second half of next year, according to a Fannie Mae's Economic & Housing Outlook Tuesday.
While inflation is surging at its fastest pace in four decades, the odds of a soft landing, which occurs when the economy stops growing but doesn't yield a recession, coming to fruition are "even lower" as the Fed sets an aggressive path for rate hikes, Fannie Mae explained.
For the housing market, soaring mortgage rates will lead to slower housing activity, which is why Fannie Mae has cut its 2022 home sales forecast to -7.4% vs. -4.1% in the prior view, followed by a decline of 9.7% in 2023 compared with -2.7% in the previous estimate. Earlier, MBA mortgage applications dropped 5%, with refis taking the biggest hit.
With home prices at extraordinarily high levels, homebuying conditions have worsened, though "we are not expecting the next recession to result in a 2008-like housing or financial crisis," as credit quality is "far superior" now than during the Great Financial Crisis era, Fannie Mae said.
The government-sponsored enterprise forecasts home price growth to fall to 10.8% annual growth by year end vs. 20.0% in Q1. Sees mortgage originations to total $2.8T in 2022, down from the prior forecast of $3.0T.
Goldman Sachs in early April had predicted a 35% chance of a recession over the next two years, putting emphasis on labor market headwinds. Deutsche Bank economists also recently forecasted a 2023 recession.
On April 19, Fannie Mae predicted that U.S. homebuying demand will remain solid.