Fannie Mae says a recession is likely to hit next year, and it could hit the housing market too

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A major mortgage guarantor says that an economic slowdown might come sooner than expected.

A growing number of banks and investors are warning that an economic contraction within the next few years is likely.

The Federal Reserve is raising interest rates to fight inflation, which is sitting at a four-decade high. According to the latest economic outlook report released this week by Fannie Mae, the U.S. economy could be in for a moderate recession due to the combination of these two factors.

The report reiterates Fannie Mae's earlier prediction that a modest recession is likely to hit in the second half of 2023, with the Fed unlikely to hit its target of a soft landing for the economy.

The mortgage company writes that a contraction before the end of next year is not out of the question because of rising interest rates and turmoil in the global market.

Doug Duncan, senior vice president and chief economist at Fannie Mae, said in a statement that financial conditions have tightened significantly and the economy is slowing faster than previously expected.

A constrained global supply of agricultural products is raising the likelihood that a food unaffordability crisis could hit the U.S., and the Biden administration has already announced measures to increase domestic agricultural production. Food affordability is becoming an issue in developed countries where food prices are rising fastest.

Food prices are likely to be a major contributor to an economic recession due to an ongoing surge in housing prices in the U.S., with fewer potential buyers able to afford them, according to Fannie Mae.

In its last report, the lender said that a strong housing market might help cushion the blow of a recession, but in its May forecast, it said that the rising mortgage rates will likely contribute to a significant slowdown in home sales as early as this quarter.

Eventually, this will lead to a deceleration of the historically high home prices buyers have been saddled with for the past few years, as high mortgage rates pull more prospective buyers out of the market. The decline in home sales will contribute to a moderate recession and economic contraction, even though the housing market is unlikely to cool enough for the economy to crash as it did in 2008.

Duncan said that rapid and substantial rises in mortgage rates have had the effect of slowing activity.