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With mortgage rates in retreat it looks like home sales will bottom this year. But the U.S. economy is nevertheless likely headed for a modest recession in 2024, economists behind two closely watched forecasts say.

Previous Federal Reserve interest rate hikes continue to slow the economy, leading many investors and some forecasters to expect the Fed will lower rates as soon as this spring, which might help the U.S. dodge a recession and achieve a “soft landing” in 2024.

But Fannie Mae forecasters still see gross domestic product (GDP) shrinking in the second and third quarters of 2024 — the very definition of a recession. In their Dec. 12 economic forecast, analysts with the Mortgage Bankers Association also predicted that the economy will contract for two consecutive quarters, but in Q1 and Q2.

In releasing their latest housing and economic forecasts Monday, Fannie Mae economists conceded that they were wrong that a recession would take hold in 2023, and agree that the Fed looks ready to pivot on rates next year.

 “Last week’s comments by Chairman Powell, as well as the Federal Reserve’s updated Summary of Economic Projections, suggest increased Fed confidence that a soft landing has been achieved and inflation is headed sustainably to 2 percent,” Fannie Mae Chief Economist Doug Duncan said in a statement. “Clearly, the many economic forecasters who previously forecasted a recession beginning in 2023 were wrong, including us.”

But Duncan said the impacts of the 11 rate hikes the Fed implemented between March 2022 and July 2023 are still working their way through the economy. Consumer spending also remains stretched relative to personal incomes, which is likely to result in “slightly negative growth” next year.

For real estate professionals, the good news is that MBA and Fannie Mae economists agree that home sales probably bottomed out in Q4 2023, and forecasters at both organizations now expect to see mortgage rates come down significantly next year.

Agreement that mortgage rates are poised to drop

Source: Fannie Mae and Mortgage Bankers Association forecasts, December 2023.

Last month Fannie Mae economists were predicting 30-year fixed-rate mortgages would still be averaging 7.1 percent in Q4 2024, and not drop below 7 percent until Q2 2025.

With mortgage rates already well below 7 percent as investors react to the Fed’s recent policy shift, Fannie Mae forecasters now see mortgage rates dipping to an average of 6.5 percent during Q4 2024, and 6.1 percent by the final three months of 2025.

That puts Fannie Mae economists in closer alignment with their MBA rivals, who have been more bullish on the prospects for rates to come down. In their Dec. 12 housing forecast, MBA economists projected rates on 30-year fixed-rate loans will drop to 6.6 percent during Q2 2024, in time for the crucial spring homebuying season, and be back below 6 percent by Q1 2025.

Diverging views on 2024 home sale growth

Source: Fannie Mae and Mortgage Bankers Association forecasts, December 2023.

Fannie Mae economists expect home sales will start picking up in Q1 2024 and keep growing for eight consecutive quarters. But they also predict that next year at least, sales growth will be modest.

With homes still priced out of the reach of many buyers, and the “lock-in effect” making some homeowners reluctant to sell, Fannie Mae economists see sales of new and existing homes growing by just 0.1 percent next year, to 4.79 million.

“The drivers of slow sales are well known at this point: unaffordability, lock-in effects, and a lack of existing inventories freezing much of the housing market,” Fannie Mae economists said in commentary accompanying their latest forecast. “While we believe these dynamics will slowly dissipate over time, they will remain obstacles in 2024. We forecast year total 2024 home sales to only be marginally higher than in 2023.”

With their more optimistic expectations that mortgage rates are on a precipice, MBA forecasters predict home sales will surge by 6.5 percent next year, to 5.13 million.

Economists at the MBA — who also foresee a mild recession in the first half of 2024 — agree that the lock-in effect will continue to keep a lid on inventories of existing homes for sale, but that homebuilders will take advantage of the opportunity.

MBA economists are forecasting a 6 percent increase in existing home sales next year, to 4.37 million, and a 10 percent surge in new home sales, to 756,000.

“The lock-in effect will continue to suppress existing inventory, which opens the opportunity for builders to provide a higher share of total sales,” MBA economists said in commentary accompanying their Dec. 11 forecast.

Home price appreciation could help fuel mortgage lending

Source: Fannie Mae and Mortgage Bankers Association forecasts, December 2023.

The expected growth in home sales, coupled with continued but slower growth in home prices, could boost 2024 purchase mortgage volume by 14 percent, to $1.51 trillion, MBA forecasters predict.

And if mortgage rates fall as quickly as they envision, MBA economists see refinancing volume bouncing back by 56 percent next year, to $490 billion.

Fannie Mae economists see 2024 purchase mortgage originations growing by 13 percent, to $1.44 billion, and refinancings surging by 79 percent, to $451 billion.

Mortgage originations are a function of home sales and home prices, Fannie Mae economists said, and home prices have exceeded forecasters’ expectations at the start of the year, rebounding “modestly” from mild declines in late 2022.”

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