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Don’t expect lower mortgage rates, higher origination volumes or more robust any time next year, but you should expect a recession.

That was the message of Fannie Mae’s latest economic forecast issued Wednesday. The government-owned mortgage buyer expects America’s GDP to shrink up to half a percent next year, and not grow at all this year as inflation and a series of big interest-rate hikes keep biting into economic activity.

Freddie Mac’s weekly survey showed that the average interest rate on a 30-year, fixed-rate mortgage jumped a quarter of a percentage point in the last week, to 6.29 percent, marking the fifth straight week of similar increases.

“In our view, the recent interest rate surge is due to the market’s recognition of two critical factors: that inflation is indeed not transitory, and that, to tame it, the Federal Reserve will need to be resolute, even at the risk of possible recession,” Doug Duncan, Fannie Mae senior vice president and chief economist, said in a statement. “Inflation’s entrenchment – and the policy action likely required of the Fed – confirms the expectation in our forecast of a moderate recession beginning in the first quarter of 2023. That said, the rise in rates is having the Fed’s desired effect on housing, as house price growth began to slow in June. We expect the slowdown in housing to continue through 2023 as affordability constraints mount for potential homebuyers, and considering, too, that refinance activity has been significantly curtailed by the rise in mortgage rates.”

With gas prices continuing to fall rent growth and a tight labor market are emerging as some of the biggest drivers of persistent inflation which, Fannie Mae’s forecast said, “historically has been difficult to contain without a general economic contraction.”

Duncan’s team lowered its forecast for single-family total home sales in 2022 and 2023 to 5.71 million and 4.98 million, which would represent declines of 17.2 percent and 12.8 percent, respectively. While multifamily construction remains strong, Fannie Mae economists also revised their multifamily starts forecast for 2022 downward to 542,000 units even as they expect rental demand to remain strong due to unaffordably high prices and interest rates for single-family homes – a recipe for upward pressure on rents.

In his comments at a press conference following the Federal Reserve’s announcement of another three-quarter-point interest rate hike Wednesday, Fed Chair Jerome Powell said in a response to a question from CNN Business reporter Nicole Goodkind that he believes the housing sector will probably “have to go through a correction” to restore affordability to the market.

“There was a big imbalance between supply and demand. Housing prices were going up at an unsustainably fast level. The deceleration in housing prices were seeing should help bring housing prices more in line with rents and other housing market fundamentals and, you know, that’s a good thing. For the longer term, what we need is for supply and demand to get better aligned so that housing prices go up at a reasonable pace and so that people can afford houses again,” he said.

Powell also nodded to the larger structural challenges – over which the Fed has no control – that have restricted homebuilding nationwide: a shortage of available lots for single-family construction within a reasonable distance of job centers, building materials and labor cost fluctuations and zoning that prohibits denser development in many cities.

He ended with a pessimistic assessment of how long home prices and rents would continue to rise.

“I think that shelter inflation is going to remain high for some time. We’re looking for it to come down but it’s not exactly clear when that will happen. It may take some time: Hope for the best, plan for the worse. On shelter inflation, you’re going to have to assume that it’s going to remain pretty high for a while,” he said.

Housing Heading for a Tough 2023, Fannie Mae Says

by James Sanna time to read: 3 min