Economists at Fannie Mae say the Federal Reserve‘s fiscal policy is having its desired effect on the housing market – home price growth began to slow in the summer, and the GSE says the housing slowdown will continue through 2023.

The agency’s Economic and Strategic Research (ESR) Group forecasts the total home sales to decline 17.2% to 5.71 million units this year from 2021, a further downward revision from August’s projected 16.2% drop. 

The latest forecast also projects total mortgage origination activity at $2.44 trillion in 2022. The mortgage market is projected to slip further to $2.17 trillion in 2023, according to Fannie Mae.

The cool down in the housing market will persist as “affordability constraints mount for potential homebuyers, and considering, too, that refinance activity has been significantly curtailed by the rise in mortgage rates,” Doug Duncan, Fannie Mae’s senior vice president and chief economist, said in a statement. 

The ESR Group indicated there is room for price discounts on homes in the future as many publicly traded homebuilders continued to report elevated margins through the second quarter. 

“Homebuilders may have been reluctant to do so until recently as supply chain bottlenecks and labor shortages have resulted in an elevated share of homes for sale still being under construction compared to the historical norm,” according to the report by the ESR Group. 

“Over the past couple months, this number (supply of completed homes) has begun to move upward, suggesting homebuilders may soon offer greater price concessions to drive sales.”

In August, the national inventory of unsold existing homes was at 3.3-month supply, up from 1.6 at the start of the year, according to the National Association of Realtors. However, as a ratio of sales, inventories are now approaching pre-COVID levels even if the absolute number of listings remains significantly lower, the report said. 

Fannie Mae expects economic growth to resume in the second half of 2022 but forecasts that a combination of inflation, the Federal Reserve’s monetary policy and a slowing housing market is likely to tip the economy into a modest recession next year.

The agency’s Economic and Strategic Research Group continues to forecast 0.0% real GDP growth on a full-year basis through 2022, but it revised downward its expectations for 2023 growth by one-tenth of a percentage point to negative 0.5%. 

“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,” Duncan said. 

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