Strong GDP numbers point to no recession and lower mortgage rates
Fasten your seat belts, but don’t panic: It’s going to be a soft landing for the US economy, with lower mortgage rates and no recessionary turbulence on the horizon.
That’s the assessment of Doug Duncan, Fannie Mae’s chief economist. Duncan took time to chat with Mortgage Professional America to share his 2024 outlook for the housing industry. The discussion covered a range of economic issues relating to the housing industry – from affordability and interest rates to the to the mortgage rate spread and rate-lock effect.
At the outset of the discussion, a disclosure: There is nothing “normal” in the present state of the economy, he suggested. As such, he added, Fannie Mae has had to alter its predictions.
Even the outlook theme has been revised
“We’re launching our discussion on the 2024 environment,” he said during a telephone interview. “Each January, we launch it with a theme, and the theme is ‘housing awaits a balance amid economic uncertainty.’ The word ‘balance’ is probably the key word in that phrase. We did not want to use the word ‘normal’ because we don’t see anything in housing being normal if you define that by returning to the rules of thumb people have historically used.”
But there’s no need to panic. The lack of normalcy is shaping up to be advantageous for homebuyers in the way of lower rates, diminished inflation and avoidance of a recession. That elusive normalcy has prompted the GSE to amend its earlier forecast models.
“We had a mild recession in the forecast that would be starting somewhere in the second quarter,” he said. “We took that out. We now expect slow growth. The timing was good because the 4th quarter GDP (gross domestic product) numbers came out today and it was strong. It was 3.3 [percent], which is more than people thought. That sort of validated our view that while there are still things that suggest a recession’s coming, the evidence is not that it’s here. So, we made that flip.”
The Bureau of Economic Analysis on Thursday reported strong business investment, substantial consumer spending and bolstered government expenditures – all contributing to GDP growth of 3.3% in the fourth quarter. The performance bested Wall Street expectations of 2% growth.
The shifting economic landscape also prompted Fannie Mae to alter its prediction on how far mortgage rates might drop as well as the number of Fed interest rate cuts likely to occur this year, Duncan said.
“We changed a couple of things on rates,” the economist said. “We now see mortgage rates coming down ending 2024 just under 6%. Our fourth-quarter number is 5.8%, which is a shift. Previously, we had somewhere in the neighborhood of 6.5%, so that’s a pretty good drop.”
Rate cuts depend on a variety of factors
In terms of rate cuts: “We shifted our thinking on the Fed from previously three rate cuts in ’24 to now four rate cuts in ’24. The market is arguing maybe up to seven. We don’t see that; we think that’s pretty aggressive.”
A more arcane metric that’s contributed to high rates is the spread – the gap between the 30-year mortgage rates and its cousin, the 10-year Treasury yield. That interval colloquially known as the spread typically runs between 1.5 to 2 percentage points. But of late, the gap has at times exceeded 3%, unlike differentials seen during the Great Recession.
Duncan now sees a gap reduction: “We also think that as there’s more clarity on the Fed’s portfolio, some of that might show up in a reduction in the spread in the mortgage space. So, even if the underlying rates don’t fall as far, spreads narrow. That, too, will bring that rate down to consumers.”
Duncan referenced the abstraction of the spread to those outside the economic cognoscenti: “It’s funny. If you ask people why spreads are wide, they say ‘because of volatility.’ Well, what’s driving volatility? They’ll say ‘well, the Fed.’ Well, what about the Fed? Then the conversation sort of dissipates.”
He broke it down to brass tacks. As the Fed – the single biggest holder of mortgage-backed securities in the world – reduces its portfolio, the question emerges: Who will supplant them in terms of sheer holdings? Such shifts will have an impact on rate reductions, he suggested.
“As the Fed’s portfolio gets smaller, it’s less influential in the MBS [mortgage-backed securities] space,” he said. “Because the Fed was not an economic buyer; they’re a policy buyer. So as that policy influence wanes, there’s some reduction in uncertainty.
“The Fed policy, as it becomes clearer to participants about how the pace of cuts is going to be different this time, our interpretation of that is not just where the level of rates is but when they start to lower rates how fast they lower them and how far they lower them. We think there’s some uncertainty around that as well, and they will start to clarify that.”
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