Fannie Mae Thinks a Recession Is Coming in 2024. What Does It Mean for Home Sales?

Nearly every major company and organization is predicting whether a recession is around the corner. And now it's Fannie Mae's turn.

The government-sponsored mortgage financing company said recently that despite decelerating inflation, the company expects a mild recession next year. And the result could have a significant impact on the housing market.

Home sales could bottom in 2024

The Fannie Mae Economic and Strategic Research (ESR) Group noted recently that a slowing economy, paired with high interest rates, could result in fewer sales of existing homes.

"With mortgage rates having previously neared the 8 percent mark, the ESR Group expects existing home sales to decline further in the near term but bottom out in early 2024."

Mortgage interest rates have retreated a bit since Fannie Mae released its prediction a few weeks ago, but the group still expects home sales to decline in 2024 and then to rebound slowly.

What's unclear is whether declining home sales will lead to falling home prices. Home prices have increased significantly over the past three years, with the median home price rising 27.7% per the Federal Reserve Bank of St. Louis' data.

Interest rates could fall next year

Even if a recession doesn't come in 2024, Fannie Mae has some good news for first-time buyers waiting for interest rates to come down.

"Regardless of whether the economy manages a soft landing or enters a mild recession, the ESR Group forecasts mortgage rates in 2024 to retreat from their recent highs and average 6.8 percent by the fourth quarter," the company said in a statement.

And Fannie Mae isn't the only one predicting that rates will fall. The Mortgage Bankers Association said recently that mortgage rates could fall to 5.5% by the end of 2025.

There's no guarantee that mortgage rates will fall in 2024, but if a recession comes, the Federal Reserve may be more inclined to cut the federal funds rate, which could spur mortgage interest rates to retreat.

Focus on what you can control

I'm personally keeping a close eye on the housing market because I'd like to buy a home relatively soon. While I've seen home prices decrease slightly in neighborhoods I'm interested in, I still haven't seen many houses worth the price sellers are asking.

And I'm not alone in my thinking. Many potential buyers are getting cold feet and are backing out of deals. The percentage of pending home sales that fell out of contract reached 16.3% in September, according to Redin, the highest they've been in nearly a year.

Whether you're getting cold feet or aren't even dipping your toes in the housing market right now, focus on the following moves to get yourself in the best possible financial position for when you're ready:

• Save for a down payment: In many cases, you won't need to save 20% of the home's price for a down payment, but you will have to put some money toward the purchase. For example, some FHA lenders offer down payments as low as 3.5%.
• Pay off debt: The lower your debt-to-income ratio when applying for a mortgage, the better your chances of getting a loan and potentially receiving a lower interest rate. This is why paying off your credit cards, or at least considerably lowering the amount you owe, can be a great move before applying for a mortgage.
• Talk to more than one lender: Shopping around for mortgage lenders may seem overwhelming, but talking to multiple mortgage lenders could help you get the best deal. Thankfully, comparison shopping can be done online.

Lowering your debt, saving for a down payment, and finding the best mortgage lender for you will all go a long way toward getting you ready to buy a home in 2024, no matter which recession prediction turns out to be right.