While stronger-than-expected economic readings seem to have provided a jolt of good news for the housing market and overall economy, they could present an inaccurate view of what's ahead, according to Fannie Mae.
Maintaining its outlook of a modest recession to occur in the first half of 2023, researchers at the government-sponsored enterprise said gross domestic product would contract by 0.5% on an annual basis at the end of the year. The forecast, though, comes in a tenth of a point lower than the 0.6% decrease they predicted a month ago.
Annual GDP for 2022 ended up growing 1% from the previous year's levels, though, greater than the 0.8% that Fannie Mae anticipated it would last month.
"Right now, it's difficult to ascertain whether COVID-induced consumer behavior changes and business practices are altering seasonal data adjustments, or if the real underlying economic activity is as strong as some recent economic indicators suggest," Fannie Mae Chief Economist Doug Duncan said in a press release.
January government reports showed the U.S. economy surpassing market expectations despite elevated inflation. An increase in the number of jobs added and a low unemployment rate during the month exceeded economists' estimates, while retail sales numbers also came in more robust than foreseen.
But there are persisting concerns that the economy is performing too well, impeding efforts to bring down inflation to a targeted 2%. The annual pace still stands at 6.4%, and January's data could hide problems lurking beneath the headlines that will carry over into the rest of 2023, Fannie Mae said.
"While we now believe the expected economic downturn will not start until the second quarter of 2023, we still think a mild recession is in the cards," Duncan said. Fannie Mae sees GDP contractions of 0.4% and 1.6% in the first two quarters and echoes the outlook of the Conference Board, who similarly indicated output would slow this year.
The early-year economic strength is also causing a shift in the way bankers, including some at the Federal Reserve, are reading the tea leaves when it comes to setting monetary policy for the rest of 2023, Fannie Mae said.
"It raises the possibility of the Federal Reserve both pushing its federal funds rate target higher than currently expected and keeping it there for longer to meaningful slow economic momentum and inflation, posing larger and longer-term risks to the economy and financial stability."
Any interest rate movements will play a role in where home lending market heads this year, but the winter tailwinds appeared to have had the effect of improving the shorter-term view among mortgage originators after a turbulent second half of 2022.
In January, Scotsman Guide found 64% of originators predicted business to improve over the next six months, compared to just 22% holding that opinion in June 2022, when lenders found themselves facing a rapid surge in interest rates and a noticeable market slowdown. A majority of both mortgage bankers and brokers said they were planning for growth with shares of 61.1% and 70.5%, respectively.
Many of the dark clouds that hung over lenders toward the end of 2022 also seem to have lifted, with only 7% of originators surveyed by Scotsman saying business would be worse in the next half year, far down from 37% who held that opinion last June.
Positive sentiment was widespread throughout the country, but particularly in the South, where 68.7% of originators were planning for improved business. The West followed at 62.4%, while the share of mortgage professionals in the Midwest and Northeast seeing a turnaround came in at 60.8% and 55.6%.
January mortgage application volumes, which were up in the first three weeks of the month, likely helped lift the mood with lenders, according to the Mortgage Bankers Association. But developments in February already indicate any upward trajectory in 2023 won't be as smooth as originators might like it to be.
After the release of early-year economic indicators, mortgage rates subsequently headed higher again as markets braced for continued monetary tightening, following months of consistent decreases. Applications have likewise fallen in two out of the last three weeks.
But despite ongoing uncertainty, Fannie Mae revised its 2023 originations forecast upward, anticipating $1.69 trillion in volume compared to a January prediction of $1.64 trillion. Compared to the past two years, production will still run lower than the $2.36 trillion of 2022 or the record $4.57 trillion from 2021.
Purchases are expected to account for $1.31 trillion of 2023 volume, with refinances at $367 billion. Refinances will further diminish to a 22% share from 30% in 2022, Fannie Mae said. Last month, the GSE saw 2023 numbers coming in at $1.28 trillion for purchases and $356 billion in refinancing.
Fannie Mae researchers also upped their prediction for 2024 volumes to finish at just over $2.03 trillion, compared to $1.97 trillion it saw a month ago. Purchase originations should rise to $1.46 trillion and refinances to $577 billion.
