economists view the residential housing market as a primary indicator Is a Recession Coming, and Home Transaction and Construction Data Are Starting to Show Up positive sign that there could be a housing recession reached a low in February. several believe We’ve avoided a severe recession, and some are even optimistic that the Fed will achieve the soft landing the central bank was hoping for—a result of stable inflation without a significant increase in unemployment.
consumer spending began to plateauand the Fed has indicated that it will likely put Prohibition on rate hike in future While keeping an eye on inflation. The rate hike that began last March may finally be coming to an end. Meanwhile, signs have pointed to a recovery in the housing cycle. followed by a contraction in sales activity, a slowdown in residential development, and falling house pricesThings started to change in February.
But we can’t be out of the woods. Home selling activity always picks up this time of year. Sales activity typically increases by 34% between February and March, and home prices increase by 3% during the same period. National Association of Realtors, After little change in February, the new data for March actually shows a reversal. Furthermore, many economists are still predicting mild depression in 2023, especially in light of the recent bank closures. There is a possibility that house prices may fall further from recent lows before the economy truly recovers.
ups and downs in housing activity
Mortgage rates have come down from their peak, with recent Federal Reserve data showing the average 30-year fixed mortgage rate has come down 6.43%, This is still high enough to cause affordability pressure, but Case-Shiller US National Home Price Index It has declined by about 5% since its peak last June, and in some markets prices have fallen even further. Together, these factors have made home buying accessible to a larger group of buyers, increasing demand while housing is still in short supply – at least temporarily.
In February, existing home sales increased 13.8% For the first time since July 2020. But in March, sales activity for existing homes declined by 2.4%. North east The one exception was maintaining steady sales activity. The latest mortgage application data from the Mortgage Bankers Association also shows 1.2% decline in mortgage applications after an increase a week earlier. Similarly, the commencement, completion and authorization of new housing declined slightly in March After a spurt in Feb.
Dr. Alexander TomicDirector of the Boston College MS in Applied Analytics and MS in Applied Economics programs, says the temporary rebound in sales activity was likely a seasonal blip. “House prices are still very strong, causing affordability problems in many, if not all, markets,” he says. “Plus, interest rates are still high, and I don’t expect them to drop meaningfully anytime soon, which will put additional pressure on prices.”
There have also been regional banks pull back New mortgage issuance and recent tightening of its standards for lending, which is expected to have a significant impact on demand as most US mortgages are held by regional banks. According to Desmond Lachman, former deputy director of the International Monetary Fund, this credit crunch will curb demand for homes and increase the risk of a recession in the economy, causing multiple shocks to the housing market. He expects house prices to drop 20% from their peak, but notes that it may take some time to see the full impact.
home builder confidence Improvement in, but slowly. Even as the construction sector continues to have problems with the supply of building materials, builders are becoming more optimistic — but the National Association of Home Builders/Wells Fargo Housing Market Index has only risen to 45. That’s the most since September, but the reading still signals poor conditions for the housing market.
Factors That Can Cause Recession
According to Tomic, so far the Fed has managed to reduce inflation without undermining the economy. But using history as a guide, the Fed will likely achieve a soft landing only if there are no external shocks to the economy — in other words, a little luck is necessary. Tomic says tensions with China over Taiwan could result in “significant trade disruptions or major shocks to the financial system”, which could push the economy into recession. Tomic also says that rising inflation or inflationary expectations will prompt the Fed to raise the federal funds rate further, making loans even more expensive for consumers and businesses.
Has the Fed been successful in the past?
Economists disagree on what constitutes a soft landing when analyzing previous monetary tightening cycles, but most identify the 1993–1995 rate hikes as the result of a ‘soft landing’. soft landing, When the Fed began raising the federal funds rate in 1993, it did so as a preventive measure—the consumer price index was only 2.8% with the unemployment rate stable, but the Fed feared higher inflation and raised the federal funds rate accordingly. adjusted to.
The Fed hit the perfect soft landing in this case. The unemployment rate declined over the next six years and the inflation rate remained stable for two years before slowing slightly. GDP growth remained above 3% for most of the decade, and the Fed was praised for preventing a recession. But the Fed had luck and the foresight to intervene actively.
some may think about the feds waited too long This time it was time to start tightening monetary policy, but there was evidence that inflation may have been temporary at the time, driven by the pandemic. Meanwhile, multiple global crisis Pressures are exerting on the US economy – for example, the war in Ukraine, supply chain issues and climate change, all complicating the Fed’s ability to achieve its goals.
“The jury is still out on the possibility of a soft landing,” Tomic says. “History is not encouraging on this front, but the Fed has so far managed to slow inflation with relatively minor effects on the economy.”
How investors can respond
Home prices may not have bottomed out yet, and Tomic says he doesn’t see prices rising significantly in the near term either. “The economy is still strong, and inventory is still low because remote systems don’t require people to relocate for jobs as much as before,” he says. “However, as returns to the office increase, and turnover in the labor market also increases, there will likely be more inventory available. For all these reasons, I don’t really see a significant increase in home prices.”
Tomic doesn’t know that this is true and neither does anyone else. but again most economists Still with predictions of a recession sometime this year, bank closures impacting mortgage lending, and sales and construction activity headed down again in March, it’s fair to assume that many The prices will continue to fall in the markets. It is unlikely that national house prices will start rising rapidly again in the near future.
Following that logic, it appears that waiting out the remainder of the housing market downturn would be beneficial to investors, but price trajectories are such that market-dependent investors will need to make choices based on data in individual markets. For example, Zillow Forecast Prices are increasing in 294 markets and prices are falling in 102 markets. Some markets in the Southeast have already hit price bottoms, according to economists, so investors in Knoxville or Savannah may find now is an opportune time to buy. Meanwhile, cities such as San Francisco, Denver and Las Vegas are expected to experience further price drops in the future.
Bottom-line
Everyone is eager to avoid a severe recession, and as a result February may see some overly-optimistic outlooks on the first signs of a turnaround in the housing market. But March data paints a different picture, and most economists think there is more trouble ahead. Investors should look at local data when making investment decisions. And no matter which direction the market is headed, it’s still important to check the numbers to make sure you’ll get good returns, especially if you depend on financing. Due diligence goes a long way in mitigating the effects of uncertainty in the housing market.
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Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.
