The once-overheated housing market has cooled down so quickly in recent months that some experts actually believe the industry has slipped into a recession.
Painfully high inflation and rising borrowing costs have proven to be a deadly combination for the housing market, forcing potential buyers to back away from spending.
A slew of new economic data released earlier this month shows that the sector is starting to slow down considerably: Homebuilders’ sentiment around the industry has fallen to a two-year low, and buyers are retreating from the market as they canceled home sales as quickly as possible. The pace since 2020 and builders are rethinking construction.
“We are seeing a slump in the housing sector in terms of lower home sales and home construction,” Lawrence Yun, chief economist at the National Association of Realtors, said recently.
But recessions happen differently for buyers versus sellers. Demand is drying up, but prices are still high because supply is still very limited. With rising mortgage rates and an increasing number of potential buyers dropping deals – and Sales decline to the lowest level in two years – builders are becoming increasingly reluctant to build new homes, keeping prices high.
“It’s not a stagnation in home prices,” Yoon said. “Inventory remains tight, and prices continue to rise nationally with nearly 40% of homes still in control of their full list price.”
Sentiment among builders in the housing market fell in August to its lowest level since the start of the COVID-19 pandemic, indicating a downturn in the market, according to the National Association of Home Builders/Wells Fargo Housing Market Index, which measures the pulse of the single-family housing market.
The measure fell for the eighth consecutive month to 49, the worst extension for the housing market since the 2008 financial crisis. Any reading above 50 is considered positive; The gauge has not entered negative territory since a short – but sharp – decline in May 2020.
“More tight monetary policy from the Federal Reserve and persistently high construction costs have led to a residential stagnationsaid NAHB chief economist Robert Dietz.
The index is significantly lower than it was just a year ago when it was at 80. It peaked at a 35-year high of 90 in November 2020, buoyed by record low interest rates at the same time that American homebuyers were flush with cash and anxious. For more space during the epidemic – they began to flock to the suburbs.
The interest rate-sensitive housing market has begun to cool off significantly in recent months as Federal Reserve Moves to tighten policy at the fastest pace in three decades and withdraw its support for the economy. Policy makers have already agreed to a 75 basis point rate hike in both June and July and have indicated that another significant increase is on the table when they meet in September.
The number of home sale cancellations in July rose to a two-year high as buyers retreated from the market. About 63,000 home purchase agreements were canceled in July, equal to 16% of homes contracted that month, according to a new analysis by Redfin published Tuesday. That’s up from 15% of deals that collapsed in June and is the highest in more than two years.
“Buyers are also volatile because they fear a potential recession will cause home prices to fall,” said Heather Croy, a Redfin real estate agent in Jacksonville, Florida. “They don’t want to end up in a situation where they buy a home, and it’s worth $200,000 less in two years, so some are choosing to wait in the hope of buying when prices drop.”
As the housing market deteriorates, sellers are being pushed to lower their asking prices. Economists at Goldman Sachs predicted in an analyst note last week that the housing market “will fall further” and that home price growth will “slow sharply in the next two quarters.” Economists have predicted that home price growth will stall in 2023.
It comes as consumers face a rise in mortgage rates, which rose sharply during the first half of the year as the Federal Reserve began raising interest rates, but have eased in recent weeks amid growing concerns about the state of the economy. US economy The threat of recession looms large.
However, interest rates rose again last week after Federal Reserve Chairman Jerome Powell delivered a speech promising to fight inflation “hard”, regardless of the potential economic fallout.
“While higher interest rates, slower growth and weak labor market conditions will lower inflation, they will cause some pain for households and businesses,” Powell said. “These are the unfortunate costs of lowering inflation. But failure to restore price stability will mean much more pain.”
Average price for 30 years fixed Mortgage rate It rose to 5.66% for the week ending September 1, according to recent data from mortgage lender Freddie Mac. This is much higher than it was just a year ago when rates were 2.88%.
Weakness in the housing sector is a major problem because it plays an important role in the broader American economy: Housing spending accounts for about 18% of a state’s GDP, the broadest measure of the goods and services produced in the country.
“It is clear that the housing sector has shifted from a tailwind to a headwind for the US economy,” said Bill Adams, chief economist at Bank of Comica. “It is likely to be subtracted from real GDP growth next year.”