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Fannie Mae reduces projected 2022 GDP to 1.3%

May 22, 2022 by Staff Reporter

A combination of persistent inflation, rising interest rates and a slowdown in global economic growth forced Fannie Mae to reduce this year’s GDP growth rate.

Fannie Mae’s Economic and Strategic Research (ESR) Group dropped its projected 2022 real GDP to 1.3%, 0.8 percentage points lower than its previous forecast. It sees the second quarter of growth rebounding to 1.6%, despite the economy contracting 1.4% in the first quarter. 

Fannie Mae said the economy is slowing faster than previously expected as markets adjust to the Federal Reserve’s tightening monetary policy and are unlikely to result in a “soft landing.” 

“Uncertainty continues to weigh heavily on markets, with geopolitical risks rising as the Russian war on Ukraine extends into its third month,” said Doug Duncan, senior vice president and chief economist at Fannie Mae, in a statement. “The impact to prices of expected reductions in agricultural production, as well as continued increases in house prices, suggest to us a difficult path for the Fed to return inflation to its two-percent target rate in a timely manner – and, of course, in the absence of an economic downturn.”

While its expectations of the economy having a modest recession in the second half of 2023 remain unchanged, Fannie Mae said the constrained consumer spending power amid elevated inflation and a rapidly rising rate environment carries the risk of a contraction happening sooner. 

Fannie expects a slowdown in homesales for the second and third quarters of 2022, followed by a softening in construction activity and a large deceleration in home price growth. 

Homebuilders completed about 1.23 million houses in April, down 5.1% from March and 8.6% from April 2021, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. Single-family home completions saw a 4.9% month-over-month decrease to 1 million and multifamily completions were down 66% from March to 281,000.

Purchase and refinance originations also are expected to decline, spurred by the uptick in mortgage rates. With only 1.4% of mortgages predicted to have a 50-plus-basis point incentive to refinance, Fannie Mae expects a majority of refinance activity will be of the cash-out variety. 

“Historically, rapid and substantial rises in mortgage rates have had the effect of slowing activity, which we reflect in our forecast,” Duncan said. “Not only is the worsening affordability of homes a problem for potential entry-level homebuyers, but current homeowners are less likely to trade in their existing lower-rate mortgages and list their homes for sale, both of which will likely weigh on sales.”

Purchase mortgage rates this week averaged 5.25%, while the 30-year fixed-rate purchase rates were at 3% this time a year ago, according to Freddie Mac PMMS. With rates at a higher level, mortgage applications declined 11% this week, compared to the prior week: Refi applications were down 9.5% and purchase apps decreased 12%, according to the Mortgage Bankers Association (MBA).

Originally Appeared Here

Filed Under: BUY HOME, housingwire

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