Russia’s invasion of Ukraine is rippling through the U.S. economy, according to March commentary from Fannie Mae’s Economic and Strategic Research (ESR) Group.
The ESR Group predicts full-year 2022 real GDP growth of 2.3%, down from last month’s projected 2.8%.
The group also increased its predictions about the 30-year fixed mortgage, bumping its forecast up to 3.8% in 2022 and 3.9% in 2023. Total home sales are now expected to drop 4.1% in 2022, compared to a 2.4% decline predicted last month.
Home purchase loan volume should hold up but refinance activity is expected to plunge to only a third of originations. This should come as no surprise to mortgage professionals who are already seeing huge declines in refi activity.
“Housing is currently acting as support to an otherwise slowing economy, although it is adding significantly to inflation,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist.
“Even as interest rates are rising and reducing affordability, demographics are still strong supports for demand, and the paucity of existing home supply is supporting new construction and sales. The degree to which monetary ease is capitalized into home values suggests increased risk as rates rise, but this may be offset by some evidence that housing is an intermediate-term hedge against inflation.”
The group suggests that the central bank’s plan to fight inflation through rising rates is under increased pressure due to the invasion and may interfere with attempts to rein in prices.
“A slowing economy, decades-high inflation, expired fiscal stimulus, tightening monetary policy, and now Russia’s invasion of Ukraine are all weighing on the health of the US economy,” Duncan said.
“We marked down our growth expectations this month by half a percentage point for 2022, but risks remain firmly to the downside. The interruptions to the trade of energy, agriculture, and other commodities are putting upward pressure on inflation and making an already difficult task for the Federal Reserve even more challenging.”
Despite this, the group expects the Fed will make good on its announcement of another five rate hikes this year, starting with a quarter-point hike announced this week.
“We are attentive to the risks of further upward pressure on inflation and inflation expectations,” Fed Chairman Jerome Powell said in a news conference.
“The committee is determined to take the measures necessary to restore price stability. The U.S. economy is very strong and well-positioned to handle tighter monetary policy.”