The U.S. economy isn’t in a recession yet, even though some forecasters think it’s heading there. The labor market remains strong and consumer spending is holding up. If there is a recession in 2023, it’ll probably be a mild one.
The housing market is in for a much wilder ride. The rapid rise in interest rates this year, triggered by the Federal Reserve’s aggressive inflation-fighting regime, was bound to end an epic housing boom. Existing-home sales, which account for most housing activity, have now declined for eight months in a row. That’s the longest losing streak since 2007—the fateful year the housing bubble that led to the 2008 financial crash began to blow up.
A key gauge of homebuilder confidence has fallen to the lowest level since 2012, excluding a brief plunge during the COVID outbreak in 2020. That was the bottom of the last housing bust. “After being a big boost to growth and inflation between the onset of the pandemic and now, housing is going to be a big drag on both in the next year,” Comerica Bank wrote to clients on October 18.
Nobody thinks a housing wipeout on the scale of the last bust is coming. There aren’t millions of bad loans driving lenders into bankruptcy or waves of foreclosures putting unsellable inventory on the market. Housing inventory actually remains extremely low, with not enough homes to meet demand.
But buyers and sellers are now facing a unique set of problems that could cause months of pain before the market corrects. This adds to the gloom depressing consumer confidence, and it certainly doesn’t help President Biden and his fellow Democrats in the last weeks before the 2022 midterm elections.
So far this year, the average 30-year fixed rate mortgage rate has soared from less than 3% to nearly 7%, sharply raising the cost of paying off a mortgage. That is kneecapping demand for homes. The National Association of Realtors expects existing home sales to drop 15% this year, with new-home sales down 21%.
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Depressed demand normally brings prices down, and that will undoubtedly happen, in time. But not quickly. Home prices have only just begun to decline in price, with a 0.2% drop in the S&P/Case-Shiller National Home Price Index from June to July. Since the COVID outbreak turbocharged demand for homes in 2020, prices are still up 40%. Nobody’s getting a break when prices drop by a fraction of a percentage point.
At the moment, it’s the worst of all worlds. Zillow says home affordability is the worst in at least 15 years, with home prices 25% higher than levels that would return affordability to historical norms. Worse, Zillow says, “The outlook on inventory suggests that the market will be tight for years to come.” Costly homes can also drive rents higher, since fewer owners means more demand for rental properties and more pricing power for landlords.
Housing isn’t like a normal product, where producers adjust the supply based on demand and markets reach an equilibrium price fairly quickly. That’s because supply can’t be dialed up or down by adjusting the speed of an assembly line. Permitting restrictions and other factors make new building difficult in many areas. Builders have faced acute labor shortages, making it hard to build even if the permitting is secure. Another wrinkle: Millions of owners who refinanced their mortgages when rates were near record lows don’t want to give up that bargain by selling, even if they might have compelling reasons to move. That keeps more supply off the market.
Horrible home affordability isn’t bad for everybody. It doesn’t bother owners who aren’t looking to sell, and many of those are in better financial shape because of money they saved by refinancing. Lower levels of housing activity usually correspond with lower sales of furniture, appliances and remodeling services, but that may not be a bad thing given the surge in demand for such things during the last two years—one driver of today’s 8.2% inflation.
But housing affordability is still a national problem that prevents many Americans from building wealth and can even threaten homelessness for the lowest-income Americans. A major housing slowdown can be an economic shock in its own right.
Biden isn’t scrambling to address housing problems on the campaign trail the way he has pulled every possible lever to lower gasoline prices during the last few months. High gas prices affect every single person who drives a car, and even some who don’t, by advertising inflation in marquee fashion at every filling station. Nobody sees home prices as they drive around, and if they did, most people don’t have a mental index of what’s a good price and what’s a bad price, as they do with gas.
The housing smashup, instead, may be contributing to the sense that the economy is unstable under the Democrats who control Congress and the White House. Despite many problems in the Republican Party, voters still think Republicans do a better job handling the economy, which seems likely to help the GOP retake one of both houses of Congress in the midterms. Maybe they’ll have ideas for fixing the housing market.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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