Fannie Mae Expects a Recession as Mortgage Rates Continue to Climb—An Opportunity for Investors?


As far as economic news goes, last week was a busy one. The Federal Reserve met for its September meeting, ultimately announcing it would hold steady on its benchmark interest rate. The average 30-year fixed mortgage rate also notched its sixth consecutive week at 7%-plus. And to top it off, Fannie Mae released its latest string of forecasts, calling for a possible “mild recession” and continued housing headwinds.

“A modest contraction remains the most likely outcome,” the mortgage purchaser announced in a press release early last week. Specifically, Fannie Mae projects that a downturn will occur in the first half of 2024, bringing with it reduced consumer spending and a decreased interest in housing, among other goods and services.

But what could that downturn look like on the ground for real estate investors, and does it mean opportunity? Here’s what Fannie’s data—and other forecasts—are currently projecting.

What’s Happening With Mortgage Rates?

The Fed’s rate doesn’t directly correlate to mortgage rates, but they typically move in a similar direction. And since the Fed started increasing its federal funds rate back in March of last year, mortgage rates have soared, climbing from the high 3% range to upwards of 7%. 

While the Fed hasn’t said for sure what it will do with rates moving forward, Chair Jerome Powell did say at the August meeting, “The process of getting inflation sustainably down to 2% has a long way to go … We are prepared to raise rates further if appropriate, and we intend to hold policy at a restrictive level until we are confident that inflation is moving down sustainably toward our objective.”

Translation: More rate hikes could be in the future—but a rate drop? That’s probably not in the cards anytime soon (which probably means mortgage rates will remain around their current level for a while).

Fannie’s forecast says as much, predicting the year will finish out at a 7.1% average rate on a 30-year fixed-rate mortgage—right on track with today’s 7.19%—before dipping only slightly to 6.8% in the first quarter of 2024.

What About Home Prices and Demand?

As we enter the “mild recession,” as Fannie puts it, and mortgage rates stay elevated, consumers will start to pull back on housing, and home prices could decline.

As of now, the mortgage purchaser’s Home Price Index predicts price growth of just 3.9% in Q4 2023 (over Q3) and 2.6% growth in the first quarter of next year. By the end of 2024, Fannie Mae projects prices will fall 0.7% nationwide. 

Doug Duncan, senior vice president and chief economist at Fannie Mae, said:

“Households remain confident in their own employment, even though they don’t feel great about the overall economy, and the vast majority don’t believe it’s a good time to buy a home, as mortgage rates and home prices continue to constrain affordability. This is evidenced by recession-level home sales volumes resulting from the very low levels of existing homes for sale and the significant affordability challenges. We expect that total housing market activity will remain at a low level into 2024 as the Federal Reserve continues to hold the line on interest rates against inflation.”

According to CoreLogic, the five markets with the highest likelihood of home price declines are:

  • Provo-Orem, Utah
  • Spokane-Spokane Valley, Washington
  • Cape Coral-Fort Myers, Florida
  • North Port-Sarasota-Bradenton, Florida
  • Lakeland-Winter Haven, Florida

All have an above 70% probability of price declines in the next year. 

An Opportunity for Investors

A mild recession could come with some valuable opportunities for investors. With competition down and home prices falling (or at least seeing very little growth), the next few quarters could be a good time to lock down some properties you can hold and rent for the long haul.

Related: Your Guide to Finding The Best Investment Properties

Just be prepared for a mortgage rate at around the same level we’re seeing today: According to Fannie’s predictions, rates will stay at 6.3% or higher through at least the end of 2024. 

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

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