The Real Impact Of A Housing Market Recession

Key Takeaways:

• A housing market recession occurs when home sales decline for six months straight, which officially happened in July 2022.
• Two main forces are driving the housing market recession: increasing interest rates and increasing construction costs.
• When the housing recession is done, we will enter a housing recovery cycle. This is the best time to buy below-market value properties.

Across the United States, we have seen prospective buyers struggle to find an affordable home and get an offer accepted in the last couple of years. Now we’re seeing those same prospective buyers turn up skittish as home prices fall. Many experts are debating whether this is a housing recession or simply a correction of the meteoric climb of home prices during and after the pandemic. The recent data officially points to a housing market recession, but some believe it’s a housing recession simply because builders aren’t building.

How much are housing prices dropping?

We’re finally witnessing a pullback from the quick jump in real estate prices, but the real question is how far will home prices drop? As interest rates climb higher and home sales decrease, the prices of real estate have come down. Gone are the days of the COVID-19 housing boom that led to bidding wars, all cash offers, and increased home prices across the country.

When is it a reasonable time to enter the housing market?

This is one of the most important questions that folks are asking these days because buying a property is one of the most expensive decisions that we will ever make. It’s a reasonable time to enter the market when you can find a home that you can afford; this means the overall purchase price as well as the monthly mortgage costs. Unfortunately, higher mortgage rates are making this a challenging time for many folks to enter the housing market.

What inputs drive the current real estate market?

Home sales, new housing starts, and mortgage rates are the inputs that drive the real estate market. In a previous article here, we shared the following numbers:

“Housing starts, or homes newly under construction, plunged 9.6% in July, 2022. The number of new construction projects totaled just 1.4 million, or 100,000 fewer than expected, while building permit applications fell 1.8% from June levels.”

What is a housing market recession?

A housing market recession occurs when home sales decline for six months straight, which officially happened in July 2022. The National Association of Realtors (NAR) just published new data stating that existing home sales were down 5.9% for July 2022 and 20.2% from one year ago.

NAR Chief Economist Lawrence Yun went on record to state, “We’re witnessing a housing recession in terms of declining home sales and home building … However, it’s not a recession in home prices. Inventory remains tight, and prices continue to rise nationally, with nearly 40% of homes [on the market] still commanding the full list price.”

So what exactly is causing this apparent housing market recession?

Two main forces are driving the housing market recession: increasing interest rates (thanks to recent rate hikes from the Federal Reserve) and increasing construction costs. In an environment with higher interest rates than we’ve seen in decades, many new buyers are reluctant to purchase a home.

The cost of construction materials increased substantially during the pandemic supply chain slowdowns. Post pandemic, these prices haven’t returned to normal as widespread inflation has driven the prices of goods even higher.

The combination of these two forces have driven many would-be home buyers from the real estate market.

At this point, it’s important to note that experts in the media aren’t future tellers with clairvoyant abilities. While professionals do their best to predict what’s going to happen based on accessible information, there’s nobody that can state with certainty what will happen in the future. This is why we must look at accurate inputs to help us track and forecast real estate movements.

Tracking and Forecasting Real Estate Movements

You must track real estate movements to see the impact of a housing market recession on the economy and vice versa.

How do you track real estate movements?

Homebuilding starts

Homebuilding starts are a leading indicator of the real estate market. The Census Bureau recently released some disappointing news. Housing starts (new construction) dropped 9.6% in July 2022.

Since builders react to housing demand, we must take notice of this number as it can impact the real estate market for years to come. For instance, what will happen if interest rates drop and there’s an insufficient supply of houses to match demand?

Sentiment index

According to the National Association of Home Builders (NAHB), homebuilder sentiment has dropped for eight straight months, hitting 49 in August (a 6-point decrease). Anything under 50 is considered negative. Since buyers and builders are struggling with higher costs, the index is in the negative for the first time since 2014 (aside from a brief plunge at the start of the pandemic).

The number of home sale cancellations

According to a new analysis by Redfin, about 63,000 home purchase agreements were canceled in July 2022, which represents about 16% of total home contracts for the month. This is the highest percentage of cancellations since the pandemic stalled home sales in March and April of 2020.

With homes staying on the market longer, buyers are starting to realize they have more power. With this newfound bargaining capability, buyers are requesting additional repairs since they can make conditional offers now that they’re not so desperate. Other buyers were unable to close the deals because they no longer qualified for a mortgage due to the increased interest rates. Homes were much more affordable with an interest rate of around 3% compared to 5%.

New home sales dropped 9.6% in July 2022 because builders are responding to the pullback in demand for new projects.

National Association of Realtors report on sales of existing homes

Since NAR announced that sales of existing homes were down 5.9% for July, this indicated to many experts that a housing recession has officially begun.

The median existing-home sales price went up 10.8% from last year to $403,800. That’s down $10,000 from the previous month’s record high.

The recent increases in mortgage rates

What impact has the recent increase in mortgage rates had on the housing market? The increased mortgage rates have priced many folks out of the market since they either no longer qualify for the mortgage or don’t want to be stuck with astronomical mortgage payments from buying a house at an inflated price.

Home price index

Recent data released by NAR shows that buying a home is the least affordable that it has been in over three decades. The housing affordability index, calculated using median single-family home prices, mortgage interest rates, and median family incomes, reached 98.5 in June. This number is a 32.2% decrease since June 2021 and the worst monthly score since 1989.

Declining housing affordability coincides with the highest inflation levels in over 40 years, making this real estate recession a real concern.

The Housing Cycle

To understand the true importance of a housing market recession, we must look at the housing market’s cycle from a historical perspective. The four phases of the real estate cycle are recovery, expansion, hyper supply, and recession. Since it’s evident that we’re currently in a recession, we have to look at the next phase of the cycle.

What comes after the housing recession?

When the housing recession is done, we will enter a housing recovery cycle. This is the best time to buy below-market value properties. However, it’s not always easy to tell when this cycle has begun.

How soon will a housing recovery happen following a recession?

This is where things get tricky in the housing cycle as the lingering effects of the recession are present, and many folks are hesitant to invest in or purchase real estate. Of course, you’ll never know for sure when the recovery stage is beginning, but two key signs include:

• Real estate prices are rising after bottoming out, prices are increasing from their lowest point.
• The general economy is recovering, employment is increasing and there are signs that the economy is doing well.

You also can’t ignore the role of government policies in boosting the economy. This is why many experts are eagerly awaiting the Fed’s September interest rate announcement.

What does a housing recession mean?

For sellers, a housing recession means you may need to temper your expectations. You may not get that bidding war that you hoped for, and high prices may scare some potential buyers away. Your home could be on the market for a longer period of time, and potential buyers could demand more from you in terms of repairs.

As a buyer, you must accept the reality of a limited inventory and higher interest rates. You may want to seek out other asset classes if you’re simply looking at real estate as an investment since the uncertainty will continue for an unknown time frame.

Should you buy a home during a housing market recession?

We’ve looked at the idea of buying a home during a recession in general, but what about a housing recession? With high-interest rates and increasing costs of construction, you may want to hold off on purchasing real estate until the market stabilizes so that you don’t get locked into a higher interest rate on a home that you purchased for an above-market price.

However, if you notice that housing prices are dropping and you find yourself sitting on a decent-sized down payment for your home, you may want to take advantage of this unique opportunity.

There are five long-term benefits of owning real estate:

• When you get a 30-year mortgage, it is a hedge against inflation. Rents will go up, but your 30-year mortgage will keep the same rate unless you refinance to a lower one.
• There are tax benefits to owning real estate.
• Over longer time horizons, you can expect to see price appreciation in real estate.
• You’re paying down the loan over time, providing you with equity in an asset.
• You need somewhere to live, so owning a home has a functional use.

Sometimes real estate is an amazing investment that provides you with steady yearly appreciation. At other times, your primary residence will just be a place for you to raise your family in the right community. Timing is not always an option for all of us.

Real estate as an Investment in your portfolio.

We look at stocks, bonds, cash and real estate as the four main asset classes of investing. Real estate can also be looked at as an alternative asset class because there are times in which the real estate market will behave in an uncorrelated manner relative to the stock & bond markets. This becomes an attractive way to diversify a portfolio by having proper real estate holdings as investments.

When you consider owning real estate in your investment portfolio, there are many public companies to choose from and ways to own real estate with your accounts, Q.ai can help pull real estate-driven assets into your portfolio and weather the coming volatility. Best of all, you can activate Portfolio Protection at any time to protect your gains and reduce your losses, no matter what industry you invest in.

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