The housing recession isn't over yet

The U.S. housing market is slowly stirring back to life after entering a deep freeze in mid-2022, but the worst may not be over for the sector just yet.

Fannie Mae economists predicted in a revised forecast that the housing market recession could regain momentum later this year as tighter credit conditions squeeze buyers, sellers and builders.

Residential fixed investment, which accounts for about 5% of total GDP and measures construction of new housing structures, residential remodeling and production of manufactured homes, already declined in the first two quarters of 2023 and is projected to continue dropping until the beginning of next year.

While the construction of multifamily housing structures has proven "surprisingly resilient in recent months," the Fannie Mae economists are still projecting a "large slowdown in activity" later this year. Rent growth has eased – or outright declined – from the previous year while vacancy rates are also gradually increasing.

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"There is a record number of multifamily units currently under construction, which are scheduled to come online later this year and into 2024," the analysts wrote in the report. "Combined with tightening credit for construction lending, which we expect will soon be realized by a slower new project pipeline, we are expecting a significant slowdown in starts later this year."

And the downturn in the housing market could soon spill over into the broader economy, according to Fannie Mae. The analysis shows the U.S. entering a recession in the second half of 2023, with consecutive GDP declines through the first quarter of 2024.

For months, higher mortgage rates have dampened consumer demand and brought down home prices. As rates have slowly fallen from a peak of 7%, the housing market has shown early signs of stirring back to life.

"A modest recession is the likeliest outcome – and that its timing remains the principal outstanding question – as the Fed is likely to maintain tighter policy for longer if wage-related inflationary pressures do not subside," they wrote.

The interest-rate-sensitive housing market has cooled rapidly in the wake of the Federal Reserve's aggressive interest-rate hike campaign. 

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Policymakers already lifted the benchmark federal funds rate 10 consecutive times as they try to crush stubborn inflation and cool the economy.

However, the return to lower mortgage rates has not been smooth. In fact, rates moved significantly higher to start the week, according to a separate survey from Mortgage News Daily, with the average rate on the popular 30-year mortgage climbing to 6.69% from 6.59%.

Those rates remain significantly higher than just one year ago, when rates hovered around 5%.

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Limited inventory has also bolstered demand and prices this month.

A recent report from Realtor.com showed that the number of available homes on the market in March is down more than 50% from the typical amount before the COVID-19 pandemic began in early 2020.

In fact, Fannie Mae economists said the lack of resale inventory will actually prevent the housing market from sliding into a deep recession – and avoid a national home price crash.

"Even though mortgage rates remain elevated compared to the previous few years, the acute lack of housing supply remains supportive of home prices," Fannie Mae economist Doug Duncan wrote recently. "Of course, the shortage of homes for sale is currently being exacerbated by the so-called ‘lock-in effect,’ which continues to disincentivize huge numbers of households with low mortgage rates from listing their homes."