Home prices and mortgages will stay high this year, but housing activity is set to cool further amid mild recession, Fannie Mae says

• High mortgage rates and home prices will persist, but activity will slump amid a mild recession, Fannie Mae said.
• Mortgage rates have been influenced by the Fed's rate hikes, and rates could remain high this year.

Elevated mortgage rates and historically high home prices will persist this year, though those factors will also contribute to lower levels of housing activity in 2023, Fannie Mae said in an outlook published this week.

The government-sponsored mortgage giant said it expected a modest recession to hit the economy in the first half of the year, while mortgages and home prices will remain elevated.

The Fed last year aggressively raised its policy rate by 425 basis-points to rein in inflation, a move that's influenced mortgage rates and taken the heat out of the housing market, which saw a frenzy of activity during the pandemic. The average rate on the 30-year mortgage topped 7% last year for the first time since 2001, and housing demand has tumbled as buyers assess affordability.

Mortgage rates have eased slightly in recent weeks as the Fed dials back the size of its rate hikes, which have lowered interest rate volatility. But central bankers could easily ramp up monetary tightening efforts and help push rates higher again, particularly if inflation indicators, like the labor market, remain hot. Prices could also rebound, despite easing inflationary pressures in the past three Consumer Price Index reports.

"The Federal Reserve does as it has stated it will do and holds the federal funds target at the terminal rate longer to ensure no inflation resurgence – then the accompanying rate decline and associated revival in housing activity will likely be delayed. In either case, we expect 2023 to be a slow year for the housing market," Fannie Mae's chief economist Doug Duncan said in a note on Friday.

Though other industry experts have warned of a 2008-style housing crash, that scenario is unlikely, Fannie Mae said, as fewer borrowers are vulnerable to interest rate shocks and the industry has healthier debt levels than it did leading up to the Great Recession. The note forecasted a steady decline of 6.7% in home prices over the next two years.

The housing market will likely be influenced the Fed's next few rate hikes, with expectations of a 25 to 50 basis-point increase in February and March of this year before pausing. Fed officials have signaled rates could stay high through 2023, with Bank of America, JPMorgan, and Citibank forecasting at least a mild recession in the first half of the year.