The story begins like any great story, by diving into the data. Fannie Mae has forecasted that the third quarter gross domestic product (GDP) will be up 2.3% annualized. This slight increase is due to the rebound of short-term net exports and business inventory investments. However, this is hypothesized to only be temporary since it is mimicking a normalization pattern in global trade following a historically large trade deficit from the first half of 2022. Forecasting for fourth quarter GDP gives us more information to act on.
Before we get too far ahead of ourselves, let’s make sure that we are all on the same page in terms of terminology. What is Fannie Mae? Fannie Mae is the Federal National Mortgage Association (FNMA). It is a United States government-sponsored enterprise that has been publicly traded since 1968. It was founded in 1938 during the Great Depression. With a purpose to expand the secondary mortgage market by securitizing mortgage loans in the form of mortgage-backed securities. This allowed lenders to reinvest their assets into even more lending, thus increasing the number of lenders in the market. Fannie Mae has a brother organization Freddie Mac or the Federal Home Loan Mortgage Corporation (FHLMC).
Gross Domestic Product
Gross domestic product (GDP) is a gauge of our economy’s overall size and health. It does so by measuring the total market values (gross) of all U.S. (domestic) goods and services produced (product) each year. We can then compare year to year in order to determine whether or not the economy is expanding by producing more goods and services or contracting due to less output.
Fannie Mae has forecasted that annualized rates will be down 0.7% and a real GDP projection based on Q4/Q4 basis will be down 0.1%. They hypothesize that sluggish consumer spending, ongoing quantitative tightening of monetary policy, and other signs of weakness throughout the global economy and financial conditions will contribute to a decline in the economy. These factors will continue to force the economy to contract and by the end of 2023 the unemployment rate will return to above 5%. They forecast that 2023 will end with GDP being down 0.5%.
Fannie Mae is also forecasting a modest recession throughout 2023 based partially on the limited labor market. In times of recession, it is necessary for the labor market to be strong in order to alleviate inflationary pressures. However, recession does not breed productivity and therefore there is little to lean on and is hard to trust that the declining labor market will be strong enough to bolster us out of a recession in record time. Once the labor market is strong enough to bring us to above-target inflationary pressures monetary policy will likely ease, allowing the economy to return to growth. Historically, in periods of rising interest rates there is a tendency for financial crises to brew within the global economy. Given this fact of time and the quickness interest rates have risen we can expect that such an event is likely in the coming quarters. If this does unfold it could lead to a deeper, more economically painful decline of GDP.
Current Home Sales and Employment Environment
2022 home sales across the nation are forecasted to be down 18.1% from 2021. This conclusion was based on slowing home sales data coming in and the increasing mortgage rates (a national average of 7% at the time of writing this) and the current 2023 forecast shows roughly 1 million fewer home sales than 2022. Year-end 2022 home prices are expected to be up 9% year-over-year and year-end 2023 home prices are expected to be down 1.5%.
In August the Job Openings and Labor Turnover Survey showed that job openings had declined by 1.1 million. In the first clear sign that labor market may be cooling down. A metric that the Fed, specifically Jerome Powell take heed. Fannie Mae forecasts that this metric will continue to decline over the remainder of 2022 and at least into early 2023. Jerome Powell has made clear that the Fed will continue to raise rates until there is an evident decline in the labor market as well as an evident decline in inflation.
While home sales and new construction are slowing down the developers are not quite feeling the heat just yet. Due to the increased number of multifamily housing and the current high demand in the renter’s market, these new constructions are not expected to fall in value just yet. Single family housing on the other hand is reaching pre-2008 levels of unaffordability, meaning that more and more individuals will continue to rent. Average families are continuously being priced out of the housing market and forced to rent housing from fortunate landlords who have the capital to continue to invest even when prices are rising out of control.
After the pandemic the economy abruptly tried returning to before the COVID-19 related recession. In this recovery attempt it seems that the economy overshot sustainable growth. This growth was too quick and too volatile to last indefinitely. We are seeing data move back to pre-2008 levels. In turn the Fed is also raising the interest rates to higher than they have been in over a decade. These two events sure do make a convincing argument that we are in for a mild recession. As investors it is our job to study the market, see the trends, compare them to historical data, and most importantly, apply what we have learned. This allows us to be financially prepared to make smart decisions in the near future once things have begun going down. Recessions are necessary in our economy and if you play your cards just right recessions can help exponentially build your wealth.
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