‘Forceful’ Slowdown In Home Prices As Warning Signs Become ‘Eerily Similar’ To 2000s Crisis

Topline

Home prices continued to decelerate at the fastest pace on record in August—intensifying a decline since this spring that has some experts worried the abrupt turnaround in the housing market could ultimately push the economy into a recession.

Americans are now shelling out a higher percentage of their income to make mortgage payments, but … [+] record price spikes are finally starting to flatten out.

Key Facts

Home prices across the country climbed 13% in August on an annual basis, compared with 15.6% one month earlier—marking the largest deceleration in the history of the S&P CoreLogic Case-Shiller Home Price Index, according to data released Tuesday.

Prices in the nation’s largest cities also decelerated rapidly, with the Case-Shiller 20-City Index, which measures prices in cities such as New York, Los Angeles and San Francisco, falling 1.6% month over month as prices in all major markets posted declines.

The biggest declines occurred in the West—where booming pandemic-era demand has abruptly collapsed amid higher mortgage rates—and was most pronounced in San Francisco, Seattle and San Diego, with prices falling by 4.3%, 3.9% and 2.8%, respectively, since July.

In a statement, S&P managing director Craig Lazzara said the decline “clearly” shows the growth of home prices peaked this spring and that the “forceful deceleration . . . may well continue” as the Federal Reserve continues to move interest rates higher—making mortgage financing more expensive and housing less affordable amid an increasingly challenging economic environment.

So far, mortgage rates have skyrocketed from less than 3% during the pandemic to a 20-year high of nearly 7%—pushing affordability to the worst level in decades and effectively “taking a wrecking ball to the housing market,” says James Stack of InvesTech Research.

Stack says how the housing market ultimately unwinds will be a “determining factor” in the depth and duration of the “probable” recession ahead and notes the median homeowner’s mortgage payment now eats up more than 30% of their income—worse than during the 2005 housing bubble and exceeded only by the period of record-high interest rates in the early 1980s.

Crucial Quote

“The message today is eerily similar to [the] warning in 2005,” says Stack. “It would be difficult to argue that the U.S. housing market isn’t heading for a hard landing.” Median home prices ultimately collapsed more than 30% and took nearly a decade to recover after the 2005 housing bubble imploded. The median sales price climbed to a record $406,000 in the second quarter but is projected to fall 8% to $375,800 early next year. Some experts say the drop could be as steep as 20% in major markets.

Contra

Americans are shelling out a higher percentage of their income to pay their mortgages, but the quality of borrowers is “vastly different” than it was during the housing bubble in 2005, analysts at wealth advisory Glenmede point out. At the time, only about 25% of mortgages went to borrowers with credit scores greater than 760. Now, the share is about 70%. “Housing will likely be a contributing factor to slowing economic growth but not as much as the last housing bubble’s collapse,” the analysts say.

Key Background

Though the housing market correction is slated to help inflation come down, experts are increasingly worried the abrupt slowdown could ultimately lead to a recession. Residential investment represents about 5% of the nation’s overall economy, and Comerica Bank forecasts the housing market’s collapse will subtract about half a percentage point from overall GDP growth this year, representing about $114 billion in economic activity. With fewer Americans moving, housing-related industries will also slow—marking another headwind to the economy, Comerica notes.

What To Watch For

The Bureau of Economic Analysis is slated to release its first estimate of third-quarter GDP growth on Thursday.