The U.S. housing market, in the telling of housing bulls, has stabilized. New home sales are rising again, as aggressive builder incentives pull buyers back into the market. Meanwhile, mortgage rates falling back under 7%, combined with the housing market entering into the busier spring season, has seen many regional housing markets flip from correction mode to growth mode. In fact, only 16% of regional housing markets tracked by Zillow saw a home price decline between March and April.

When it comes to housing, the worst is behind us. Or is it?

The housing market recession isn’t over just yet—and it could regain momentum as the market moves into the seasonally slower summer and fall months. At least that’s according to a revised forecast just put out by Fannie Mae.

Through the first quarter of 2023, U.S. housing market activity as measured by private residential fixed investment (i.e. the core of housing GDP) has declined, on a nominal basis, for four straight quarters. And more contractions could be on the horizon. Indeed, Fannie Mae expects residential fixed investment to fall in Q2 2023 (-5.9%), Q3 2023 (-9.1%), Q4 2023 (-6.4%), and Q1 2024 (-1%).

“There is a record number of multifamily units currently under construction, which are scheduled to come online later this year and into 2024. Combined with tightening credit for construction lending, which we expect will soon be realized by a slower new project pipeline, we are expecting a significant slowdown in starts later this year,” wrote Fannie Mae economists in their report published on May 19.

The pullback on the multifamily side, according to the Fannie Mae forecast, will negate any economic boosts created on the single-family side, which has benefited this spring from builder incentives like mortgage rate buydowns.

Over the past year, the housing market has been one of the few areas of the economy stuck in recession. That could soon change: Fannie Mae’s forecast model thinks declines in the U.S. housing market will spill over and help to push the U.S. economy into a recession. Indeed, Fannie Mae is forecasting U.S. GDP declines in Q3 2023 (-1.2%), Q4 2023 (-1.7%), and Q1 2024 (-0.5%).

“A modest recession is the likeliest outcome—and that its timing remains the principal outstanding question—as the Fed is likely to maintain tighter policy for longer if wage-related inflationary pressures do not subside,” wrote Fannie Mae economists.

While Fannie Mae’s forecast model predicts that the U.S. housing market will help to drag the economy into recession, Fannie Mae economists also believe that the U.S. housing market will be a buffer against a deep recession.

“We see the conditions in the housing construction and auto sectors as likely being more of a buffer to the severity of a recession by being potential drivers of eventual recovery than a means to prevent one,” wrote Fannie Mae economists on May 19.

What does this mean for home prices?

Unlike Zillow and CoreLogic, which are forecasting slight home price gains over the next year, Fannie Mae thinks the home price correction will soon regain momentum. Fannie Mae's forecast model has U.S. home prices, as measured by the Fannie Mae Home Price Index, falling 1.2% between Q4 2022 and Q4 2023, and then another 2.2% decline between Q4 2023 and Q4 2024. If those declines come to fruition, it'd mark the first year-over-year declines measured by the Fannie Mae Home Price Index since 2012.

By the time national home prices bottom in Q4 2024, Fannie Mae predicts U.S. home prices will be 5.28% lower than the peak in Q2 2022. Regionally speaking, the outcomes are likely to vary—a lot.

That forecast is a mild correction—not a housing crash.

The reason Fannie Mae says a national home price crash is unlikely boils down to the lack of resale inventory. In fact, active inventory is still 40% below pre-pandemic levels.

"Even though mortgage rates remain elevated compared to the previous few years, the acute lack of housing supply remains supportive of home prices. Of course, the shortage of homes for sale is currently being exacerbated by the so-called ‘lock-in effect,’ which continues to disincentivize huge numbers of households with low mortgage rates from listing their homes," wrote Fannie Mae chief economist Doug Duncan in a recent report.