Could A Housing Recession Be On The Horizon?

Key takeaways

• A slew of housing reports this week have furthered speculation that a mild housing market recession could be on the horizon
• NAHB data shows that builder confidence in the new construction single family home segment dropped 8 points in October
• The Census Department reported that while building permits rose in August, new housing starts dropped month-over-month (MOM) and year-over-year (YOY)
• The National Association of Realtors announced that existing home sales and median housing prices fell in September
• Still, many experts agree that a full-blown crash is unlikely due to unprecedented consumer resilience and the slow rate of decline

Housing prices and new builds are on the decline. Mortgage rates are on the rise. And speculation of a housing market recession continues to propagate among buyers and real estate investors alike. For some, a sudden, stark dive is more likely; others see a slower, milder regression over the next year.

Either way, a series of recent housing reports have thrown fuel on the proverbial fire.

New housing reports this week

Perhaps the biggest housing report this week came courtesy of the National Association of Home Builders (NAHB) and the Wells Fargo Housing Market Index.

The NAHB/Wells Fargo HMI gauges builder perception of single-family home sales expectations on a scale from “good” to “poor.” The component metrics feed into a seasonally-adjusted index where scores over 50 suggest that most builders view conditions as “good.”

For October, the housing report found that builder confidence for new single family home construction sunk 8 points. Currently, this builder confidence metric sits around 38. That’s half its level six months ago and, aside from a brief blip during the pandemic, the lowest it’s been since August 2012.

For each component part:

• Current sales conditions fell to 45, a loss of 9 points
• Six-month sales expectations dropped to 35, a decline of 11 points
• Prospective buyer traffic slipped to 25, marking a 6-point fall

According to NAHB Chairman Jerry Konter, demand has been weakened by high mortgage rates that have created a situation deemed “unhealthy and unsustainable.”

But this isn’t the only housing report released this week.

Census Bureau data

This week, the Census Bureau and U.S. Department of Housing and Urban Development released data on September’s new residential construction. According to the housing report:

• Building permits rose 1.4% MOM, but declined 3.2% YOY
• Privately-owned housing starts fell 8.1% MOM and 7.7% YOY
• Privately-owned housing completions grew 6.1% MOM and 15.7% YOY
• Single-family housing starts fell 4.7% MOM
• Single-family housing completions grew 3.2% MOM

Together, this data paints a picture of a flagging construction market.

While new projects were initiated at higher rates last year, now, more are being completed than beginning anew. (In other words, the housing market is already well into a downward trend.)

National Association of Realtors data

Also this week, the National Association of Realtors (NAR) announced that existing U.S. home sales dropped 1.5% to a seasonally-adjusted 4.71 million in September.

Though the decline fell in line with economist expectations, it still represents the eighth consecutive monthly decline. It also marks the first time existing housing sales have fallen so many months in a row since 2007.

All told, total home sales are down 23.8% YOY, with the number of homes on the market declining 2.3% to 1.25 million units.

Meanwhile, the median price for existing homes fell from $389,500 to $384,800 MOM, after topping $400,000 for the first time ever this spring. NAR data suggests that median price declines could continue into early 2023, if not beyond.

As NAR chief economist Lawrence Yun summed up so succinctly: “The market is clearly turning.”

Expert estimates: the market could fall up to 20%

According to Pantheon Macro chief economist Ian Shepherdson, the NAHB data is a “disastrous” sign that any reported jumps in new home sales were “more noise” than signs of a potential real estate turnaround. In particular, Shepherdson predicts that new construction and home sales will continue to fall, wreaking havoc on home values.

“This is not the floor,” Shepherdson said. “The surge in mortgage rates to nearly 7% over the past few weeks has triggered a further drop in mortgage demand, and we expect home sales to keep falling until early next year.”

As Shepherdson sees it, prices have to “fall substantially” to restore housing market equilibrium. And since the supply curve for housing hasn’t yet fallen flat, plunging demand will lead the way to lower prices. All told, Shepherdson expects “a drop of 15-20% over the next year” before bottoming out.

Key takeaways from these housing reports

Other data – particularly higher mortgage rates – support the theory that housing price declines will continue for months yet. For some, recent housing report data suggests a potential housing market recession.

Already, homes have begun sticking on the market longer, creeping up from 16 to 19 days. Pre-pandemic, the average time on market for most homes was one month. Additionally, all-cash transactions remain steady around 22% as homebuyers avoid the sky-high – and rising – mortgage rates. Since March 2022, the U.S. central bank has hiked interest rates from near zero to 3-3.25% range, while the federal funds rate is now expected to end the year around 4.25-4.75%.

Still, these factors have worked together to start pushing down demand, which stands to lead to longer-term price declines. They paint a sweeping picture of rising interest rates, material bottlenecks and elevated home prices that continually weaken demand.

Noted NAHB chief economist Robert Dietz: “Given expectations for ongoing elevated interest rates due to actions by the Federal Reserve, 2023 is forecasted to see additional single-family building declines as the housing contraction continues…. Homeownership rate[s] will decline in the quarters ahead as higher interest rates and ongoing elevated construction costs continue to price out a large number of prospective buyers.”

Are we nearing a housing market recession?

The last time the housing market was this frantic occurred between 2005-2007, ultimately leading to the 2008 housing bubble crash. Now that the housing boom is threatened by soaring mortgage rates, declining supply and demand, it’s reasonable to ask: are we headed for another housing market recession?

Despite ongoing declines following a year of record-breaking price increases and rock-bottom mortgage rates, it appears that a severe housing market recession is unlikely. Rather, housing economists broadly believe that any correction will likely be modest. (In other words, we’re unlikely to experience another Great Recession-like housing bubble.)

One obvious difference between now and then is the surprising economic resilience most consumers have shown throughout the pandemic. Stricter lending regulations – many resulting from the Great Recession itself – also play a role. Nowadays, the average mortgage buyer claims more equity and a higher starting credit rating.

Additionally, wary construction firms have moderated new builds to ensure that they don’t overshoot supply. Unfortunately, it also appears that this fact has continued to buoy prices while suppressing inventory counts so that neither demand nor prices can drop organically.

Rather, declining demand is largely credited to astronomical prices and rising mortgage rates. So, while we’re unlikely to see a catastrophic housing market recession, a slow, leaking release – like that of air letting out of a balloon – isn’t unlikely.

Protection against a housing market recession with Q.ai

While higher home prices have proven valuable for real estate investors throughout the pandemic, declining prices and lowered demand could spell troubled waters ahead. Not to mention, investors are also consumers – which means the higher rates of inflation and interest bash not just your portfolio, but your wallet, too.

Fortunately, Q.ai has a simple solution: the AI-backed double threat of our Inflation Kit paired with Portfolio Protection. While one pits your money against inflation to (hopefully) come out on top, the other limits potential declines to ensure that your money is as protected as possible.

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