Fannie Mae Expects Home Sales to Bottom Out? Here’s What the Latest Forecast Says

Fannie Mae is predicting a recession in 2024 in its latest Economic Developments report. As a result, home sales are expected to bottom out next year before ultimately improving in 2025.

A 2024 recession has been repeatedly predicted by think tanks, individual economists, and financial experts. Fannie Mae adds its own forecast to the growing chorus of experts saying the same thing: Despite a strong economy, the U.S. is headed for a mild economic downturn next year.

An Economy Built on Shaky Foundations Means an Inevitable Crash

Why is this the most likely economic trajectory? For one, experts at Fannie Mae point out that the high GDP as of the third quarter of 2023—a very healthy 4.9%—is built on shaky foundations. This is economic growth fueled by debt spending rather than substantial growth in real income. 

In fact, real incomes grew by a very small 0.6% annualized in the third quarter. Simultaneously, the savings rate is declining and was 3.4% during the same period, a far cry from the robust 7% rate before the pandemic. 

All of these factors point to a situation where the current spending levels propping up the economy are unsustainable. Fannie Mae predicts that consumer spending will go down in 2024, reinstating a more ‘‘normal’’ relationship between spending and income. 

Therefore, Fannie Mae thinks GDP will decline 0.4% on a Q4/Q4 basis in 2024, although the negative figure is expected to result from the timing of the year-end report in the fourth quarter. It’s not indicative of a ‘‘deeper economic downturn.’’ 

The good news in Fannie Mae’s forecast is that the recession, if it does happen, will be very mild and won’t last into 2025, when the economy is expected to rebound, with a projected GDP of 1.6% for the year as a whole.

Anyone who’s read economic forecasts will know that labor market trends are a robust indicator of where the economy is headed as a whole. As of October, as the report points out, the unemployment rate is steadily growing. It’s currently at 3.9%, half a percentage up from April levels. Both initial and continuing unemployment claims are rising, which could again indicate that we are entering a recession. 

What About Real Estate?

Again, these are not alarming figures, which is good news for the economy in the long term. However, it’s not such good news for the housing market. Paradoxically, these unemployment levels aren’t quite high enough to make an immediate difference to interest rates. 

‘‘Given the unemployment rate is still below 4%, a premature easing of monetary policy would risk reanimating inflation, so we do not expect the Federal Reserve to be quick in cutting rates in coming months,’’ Fannie Mae’s report says. 

Needless to say, sustained high Fed rates translate into high mortgage rates that are hampering home sales. The Fannie Mae (FNMA/OTCQB) Economic and Strategic Research (ESR) Group expects things to get worse before they get better: Home sales will bottom out in early 2024, per the ESR report. 

There is a silver lining in this forecast, however: Interest rates will begin coming down in the second half of 2024, and Fannie Mae expects them to average 6.8% by the end of the year. This will happen regardless of whether there is a recession or the much-hoped-for ‘‘soft landing,’’ because the Fed’s fiscal policies are largely working toward the desired goal of reduced inflation rates. 

Final Thoughts

Overall, it could be a lot worse. While the housing market is currently suffering from surging interest rates and supply constraints, it will improve eventually. 

Doug Duncan, Fannie Mae senior vice president and chief economist, calls the results of the ESR report ‘‘unsurprising,” adding: 

“Housing has been and continues to be under serious affordability pressure, resulting in recessionary-level home sales activity. While many current owners with low mortgage rates will likely continue to be discouraged from listing their homes, we expect mortgage rates to trend modestly downward in 2024, which should help kick-start a gradual recovery in home sales into 2025.”

This isn’t to say that home sales will return to anything near pre-pandemic levels. This level of sales recovery ‘’will likely take years,’’ according to Fannie Mae’s experts. However, the worst will soon be behind the housing market: Fannie Mae forecasts that ‘’the bottom will be passed in 2024.’’ 

Investors should take heart. The housing market is not heading off a cliff—it’s just nearing the bottom of a trough.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.