Amid record inflation and higher interest rates, expectations for full-year 2022 and 2023 real GDP (gross domestic product) growth were downgraded in July due to softening consumer spending and a downward revision to business inventory investment data, according to the Fannie Mae Economic and Strategic Research (ESR) Group. 

The ESR Group forecasts real GDP will increase 0.1 percent in 2022 and decrease 0.4 percent in 2023, down from the previously predicted 1.2 percent increase and 0.1 percent decrease, respectively. The ESR Group also now expects a recession to begin in the first quarter of 2023, earlier than previously forecast, due to the aggressive monetary policy response required of the Federal Reserve to bring inflation down from its current decade-high levels.

The good news? By the fourth quarter of this year, the ESR Group expects inflation, as measured by the Consumer Price Index, to have moderated to 5.7 percent on a year-over-year basis, down from the June reading of 9.1 percent, and then to 1.6 percent by the end of 2023, below the Fed's 2-percent target.

The ESR Group revised downward its forecast for total home-sales growth in 2022 to a decline of 15.6 percent, compared to a decline of 13.5 percent predicted last month, but revised upward its home price-appreciation forecast to 16.0 percent year-over-year-growth in 2022 from the previously projected 10.8 percent. The ESR Group continues to anticipate strong deceleration in home-price growth going forward due to the lagged effects of higher mortgage rates and the slowing economy weighing on purchase demand.

While this paints a challenging picture for the economy into next year, the dynamics do offer some positive news for prospective homebuyers. According to Fannie Mae Senior Vice President and Chief Economist Doug Duncan, with rising interest rates slowing home-buying activity, homes for sale will likely come down in asking price in both new and existing homes. Homebuyers should work with a professional real estate agent for guidance on securing the most affordable home financing and negotiating the best possible price with home sellers.