Fannie Mae's latest economic forecast has predicted that home prices will drop by over 6% in the next two years. However, the good news is that the US market is in good shape to weather the decline.

Anticipated Price Drops

The Economic and Strategic Research (ESR) Group at Fannie Mae expects a home price growth decline of 4.2% in 2023, followed by an additional drop of 2.3% in 2024. These anticipated price drops are more than the mortgage giant had previously forecasted, 1.5% and 1.4%, respectively. It should be noted, however, this is the same institution that required a $187 Billion bailout from the 2008 recession – they obviously misjudged that one. 

Not a Repeat of the 2008 Financial Crisis

The rapid decline in home prices is not likely to create a shock for the market as it did during the 2006 to 2008 period when prices dropped, and borrowers walked away from mortgages, flooding the housing market with foreclosures. According to Fannie Mae, "fewer borrowers are facing interest rate shocks, loan workout and modification programs are more robust, and aggregate residential real estate and the broader financial system are substantially less leveraged compared to the 2006-2008 period."

Recession Still in the Cards

Fannie Mae revised its final 2022 gross domestic product growth estimate to 0.8% from 0.4% due to "stronger incoming indicators." Despite the year ending with more robust growth than initially forecasted, Fannie Mae said it still expected a modest recession to start in the first half of 2023. It is anticipating a contraction of 0.6% in GDP growth in 2023, down one-tenth from its previous forecast.

Consumer Retrenchment Drives General Economic Contraction

According to Fannie Mae, "consumer spending remains unsustainably high relative to disposable income, supported by consumers tapping into savings built-up during the pandemic period and taking on debt. While it is difficult to determine the exact timing, we believe it is only a matter of time before consumer retrenchment helps drive an eventual general economic contraction."

High Mortgage Rates Keep Buyers at Bay

Even with home prices dropping, elevated mortgage rates will continue to test homebuyer affordability, according to Fannie Mae. The government-sponsored mortgage lender projected home sales to drop 21.3% in 2023 from its final estimate of 2022 total sales, for an expected 4.52 million units in total sales. By 2024, sales are predicted to rebound by 12.8% for an expected 5.1 million units in total sales. The pace comes well below what the market has seen in recent years, Fannie Mae said.

Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae, recently issued a statement indicating that while the US housing market is expected to experience a decline in home prices, the country is in a better position to weather the impact than it was during the 2008 financial crisis. Fannie Mae's Economic and Strategic Research Group predicts that home prices will drop by over 6% in the next two years, with a decline of 4.2% in 2023, followed by an additional drop of 2.3% in 2024. While this prediction is higher than previously forecasted, the rapid decline in home prices is not expected to cause a shock for the market as it did during the 2006-2008 period.

Fannie Mae noted that loan workout and modification programs are more robust today than during the previous crisis, and aggregate residential real estate and the broader financial system are substantially less leveraged. The mortgage giant predicts that while a recession is still on the cards, it is expected to be modest and will begin in the first half of 2023. Fannie Mae anticipates a contraction of 0.6% in GDP growth in 2023, down one-tenth from its previous forecast.

However, even with home prices dropping, elevated mortgage rates will continue to test homebuyer affordability. According to Fannie Mae, high mortgage rates will keep potential buyers at bay, with home sales projected to drop 21.3% in 2023 from the final estimate of 2022 total sales. By 2024, sales are predicted to rebound by 12.8% for an expected 5.1 million units in total sales, a pace that is below what the market has seen in recent years.

Fannie Mae noted that a recent softening in inflation has some economists predicting that the Federal Reserve may ease on interest rate hikes. This move can signal either of two things, according to Fannie Mae. If the Federal Reserve eases its monetary policy, it can be interpreted as a view that a recession is forthcoming or that the slowdown in inflation will lead to a less restrictive monetary posture. If the latter occurs, the lower accompanying rates will likely set the stage for a pickup in housing activity going into 2024, as seen in Fannie Mae's latest forecast. However, if the Federal Reserve holds the federal funds' target at the terminal rate longer to ensure no inflation resurgence, then the accompanying rate decline and associated revival in housing activity will likely be delayed. In either case, Fannie Mae expects 2023 to be a slow year for the housing market.

When considering investing, while understanding these forecasts, it is important to note that these are national averages and do not reflect secondary markets.  Many markets (primarily in the southeast) continue to see the opposite of these trends and forecasts.  While specific pockets have already seen declines in value upwards of nearly 30%, some markets are continuing to post record sales and appreciating values.

Media Causes False Narrative and Panic:

Left, right, or somewhere in the middle of the aisle, our media has become so politically divided it is toxic to the truth.  Their narrative does not provide the crucial data, but rather the panic mentality that things are worse than they really are.  That the cause for such panic was this administration’s fault, or that administration’s fault.  The hard truth is this country’s financial institutions could never permanently maintain a 0% Federal Reserve Rate and we grew spoiled by our 2.1% loans.

Many, like myself, tie the last recession to the passing of the Gramm-Leach-Bliley Act in 1999.  At that time our country had one of the strongest economies in our history.  We had a government surplus, rather than debt, the real estate market was humming along, and we were comfortable paying a rate of 7.74% for our 30-year fixed mortgages.  As of this writing, mortgage rates are averaging 6.64%.  Have the rates risen too quickly?  Probably.  Are they sustainable?  Absolutely!  At the onset of the recession, rates were 6.7%.  It was a very short 4 years ago where we saw the rates as high as 4.7% in January of 2019.

The interest rate gaps of where we were, where we are and what is sustainable for the long-term are just a couple of basis points off from one another.  If the media would report the truth, rather than the “drama and spook” that has become the norm, the market as a whole would likely not even had to see a dip, or a correction in where we have seen it.

Possible Solutions:

Refinancing your mortgage

If you are looking to reduce your expenses, you may consider refinancing your home loan to lower your monthly payment. By refinancing your mortgage, you could take advantage of today's interest rates before they increase. This could save you money each month, helping you to manage your finances more effectively. You can visit credible.com to compare multiple mortgage lenders at once and choose the one with the best interest rate for you.

Taking Out Personal Loans to Pay Down Debt

If you are struggling in today's economy, you could consider taking out a personal loan to help you pay down your debt at a lower interest rate, saving you money each month. Visit Credible to find your personalized interest rate without affecting your credit score.

In conclusion, while Fannie Mae's economic forecast may seem concerning, it's important to remember that the current economic climate is vastly different from that of the 2008 financial crisis. While home prices are expected to drop, the housing market is in a much stronger position to weather the decline. By being financially prepared and taking advantage of low-interest rates, you can navigate the current economic climate and come out on the other side in a better financial position.