Evidence Builds For Painful Housing Recession

Housing market sentiment is at lows we haven’t seen since the 1980s. Inventory metrics are moving in the wrong direction, and mortgage rates are at levels we haven’t seen since prior to the financial crisis. How bad will the housing market get?

Falling Consumer Sentiment

The University of Michigan tracks how consumers are feeling about the housing market. You have to go back to the early 1980s to find as much pessimism as we’re currently seeing.

There are some similarities between then and now. In the early 1980s, the U.S. Federal Reserve (Fed) was raising interest rates dramatically to combat inflation, sound familiar? Rates were substantially higher then that they are now, but the chilling effect on the housing market was similar. The good news for later in the 1980s was that rates did drop over the coming years, making mortgages more affordable. However, now the Fed has plans to raise rates, not cut them. Still there are early signs that inflation could be easing and if that does ultimately prompt the Fed to cut rates that may breathe some life into the housing market.

Early Days

Despite pessimism around housing, it’s important to remember that according to Zillow data, all regions have still seen price rises on a year-over-year basis. Yes, certain regions are seeing monthly declines, but that’s not too unusual given seasonality and many regions are seeing prices hold. In fact, looking at Zillow data for the 3 months to October, only California, Utah and Nevada have seen material falls in price. If there is a housing collapse coming it has hardly begun.

There’s a giant contrast between attitudes to the housing market and where things stand right now. If housing play out as sentiment suggests, housing could be in for a rough few years. The Fed Chair agrees, Jerome Powell recently called the housing market “very overheated”.

Leading Indicators

Leading indicators, such as those provided by Realtor.com, are showing cracks in the housing market. Price discounts are increasing. The number of listings is rising, almost back to pre-pandemic levels, and time on market is increasing, though it is rising from very low levels.

These metrics are all suggesting that the housing market is softening, however the implications have not played out in house prices yet. Also, seasonality makes it difficult to untangle what is true weakness in housing rather than a seasonal trend as we leave the more active summer selling period.

Housing Affordability

Housing affordability as tracked by the Atlanta Fed is getting much worse too. Again this shouldn’t be too much of a surprise given sharply rising mortgage rates. Nonetheless, it’s another sign that the housing market may be set to weaken.

Whether you look at consumer sentiment, affordability or underlying listing data there are reasons to worry about the housing market. Still it’s important to note that house prices have been pretty subdued so far. They remain up year-on-year in just about all markets.

A housing recession could well be coming, but we haven’t seen it in house prices just yet. If the Fed were to cut rates sharply, the housing picture could improve just as it did in the mid 1980s, but they’ve made it clear they don’t have any expectation of doing so. In fact it’s the Fed Chair himself who’s willing describe the U.S. housing market as “very overheated.”