Wells Fargo Examines the Outlook for Housing and the Economy in 2023
Although a recession is likely ahead, housing expected to be steady
After a year of aggressive rate hikes, the Federal Reserve is likely to raise rates again at its next meeting in early May, according to Senior Economist Charles Dougherty of the Wells Fargo Economics Group. In an early April interview, Dougherty explained that the Fed hasn’t yet seen sufficient evidence that inflation is heading back to the Fed’s 2% target.
While its preferred gauge of inflation – the price index on Personal Consumption Expenditures – has decelerated from a 7.0% year-ago rate in June 2022 to a 5.0% annual pace in February, the Fed isn’t convinced that it’s done enough yet to wring out inflation. Hence, Wells Fargo expects the Fed to hike rates again at its next meeting in early May, putting the upper limit of the Fed’s target range for the federal funds rate at 5.25%. That’s five full percentage points higher than it was at the beginning of March 2022.
But that should be it for the Fed’s rate increases, according to Dougherty. He expects that during mid-2023, the Fed will see sufficient evidence that inflation is being constrained. In fact, the better inflation news plus the economic weakness expected in the second half of 2023 should lead the Fed to reverse course and cut its target range by 50 basis points to 4.75% by year-end 2023. The March 2023 Wells Fargo forecast puts the fed funds rate at 2.50% by the end of the third quarter of 2024.
Dougherty explained that Wells Fargo expects a recession of average depth and average duration beginning in the second half of 2023. The Wells Fargo forecast calls for the recession to be over by the second quarter of 2024.
Where will that leave housing? While recessions are challenging for every sector, home sales should be steady in 2023, said Dougherty. They’ll get help from mortgage rates, which have retreated from the highs of last fall (from 7.08% in mid-November to 6.28% in early April on a 30-year fixed-rate loan, according to Freddie Mac), and which Wells Fargo predicts will be around 5.4% by year’s end. The dramatic slowdown in home price appreciation from 16.5% in 2022’s first half to 0.9% in the second half will carry into 2023, also helping affordability. However, fading growth in employment and income later in 2023 as the economy heads into recession could produce a headwind for housing to overcome.
Dougherty points out that, as with any forecast, there are still many unknowns. Another spate of banking failures or international developments could trigger a deeper and longer recession. A soft landing in the second half of 2023 – whereby the economy slows sufficiently to lessen inflation pressures but does not contract – remains a possibility, but its likelihood, already low, is diminishing.
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