Fannie Mae now anticipates a recession to start in the second half of this year, not the second quarter.

Stronger-than-expected economic data prompted the GSE’s Economic and Strategic Research (ESR) Group to revise its Q1 2023 GDP forecast. Its outlook was based on work largely done before the collapse of Silicon Valley Bank and Signature Bank, reports National Mortage News.

It now predicts a modest recession to begin in the second half of 2023. It was previously forecasted to begin in the second quarter of 2023.

The ESR Group noted that bank failures often foreshadow economic downturns. Specifically, it cites tighter lending standards among small and midsized regional banks, along with falling business and consumer confidence as the forces that could tip an already precarious economy into recession.

Jumbo mortgages and residential construction loan availability may be compromised, as they are often originated through small and midsized banks.

That said, the ESR Group doesn’t expect a repeat of the 2008 Financial Crisis. It’s looking instead at something more akin to the S&L Crisis of the 1980s, which triggered a modest recession in 1991.

This could bring on banking-related stress that could slow the economy and take some of the steam out of inflation.

This could in term keep the Fed from increasing rates as high as was previously expected.

Last month, mortgage rates dropped. This led to more home sales. The ESR Group expects this to be temporary. Continuing affordability constraints and the “lock-in effect” will likely discourage homeowners from moving.

“Inflation has now been joined by financial stability concerns as threats to sustained growth,” said Doug Duncan, Senior Vice President and Chief Economist, Fannie Mae. “These particular pre-recessionary conditions are not unusual, as bank failures often follow monetary tightening – but this may well be the catalyst for the modest recession we’ve been expecting since April 2022.”

Duncan continued: “While housing writ large has responded to the Fed’s monetary tightening in a relatively predictable fashion, the rapid uptick in home sales in response to modest rate declines earlier this year corroborates our long-standing expectation that the housing sector will help moderate any future recession due to the significant pent-up demand.”

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