Home News Housing market activity is crashing and threatens to push the U.S. into recession

Housing market activity is crashing and threatens to push the U.S. into recession

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“Las Vegas [home] Price action in the recent frenzy of the housing market, as seen in 2008. We are absolutely feeling the heat here. The buyer pool is almost exhausted,” says Las Vegas real estate agent Kristen Riffle. luck.

But that’s not all Vibrant markets like Las Vegas and Boise Feeling the pain: This housing recession is gaining momentum across the country. In fact, as of last week, mortgage purchase applications were down 38% year over year. This is his lowest level since 2014.

Simply put, housing activity is collapsing.

But let me be clear.This “crash” in housing activity, or Fed Chairman Jerome Powell calls it a ‘difficult fix’—It didn’t come out of nowhere. It’s by design. The Federal Reserve has switched to anti-inflation mode this spring in hopes of: Higher interest rates could slow activity in interest rate sensitive sectors such as housing.

The reason the Federal Reserve slowed the housing market can be summed up in two words. It’s demand destruction. Historically, as soon as a central bank goes into anti-inflation mode, mortgage rates skyrocket. That mortgage rate shock will reduce sales of both existing and new homes. As builders cut back, demand for both commodities (such as lumber) and durable goods (such as refrigerators) decreases. It will also cause layoffs in the real estate and construction industries. These contractions spread rapidly throughout the economy and, in theory, weaken the labor market and help keep high inflation in check.

“The most frequent way we get into a recession is for the Fed to raise rates to fight inflation. A leading indicator of this kind of recession is housing.” Bill McBride, author of economics blog Calculated Risk, says: luck this summer. “this [housing] not covered, but [housing] It’s basically a target. “

Of course, we are already witnessing the economic contraction that has spurred these homes. home builders are cutting back. Real estate companies are cutting staffAlso, in some rural housing markets such as Boise and Seattle, Already in a house price correction.

“Realtors are seeing a big change as well. I called the Greater Las Vegas Realtors Association. This month she was estimating 120; but she handles about 30 real estate agent withdrawals a day,” Riffle said. That means about 30 real estate agents are leaving the company every day in Las Vegas alone.

Now let’s go back to the intro of this article.when analysts say ‘The Fed will push until something breaks’ They imply that the Fed’s inflation campaign will continue until inflation abates or something pushes the economy into recession. It may be an institutional liquidity issue. But there is also growing concern that “something” could be the housing market.

1981 and 2008

It’s not uncommon for a housing slump to trigger a recession. See economist Edward Reamer’s 2007 paper. “housing teeth business cycle Riemer found that 80% of the post-World War II recessions followed a “substantial” housing downturn.

But when analysts talk about housing being “breakable,” they’re talking about the housing slump not only triggering the recession, but being the root cause. Good examples are 1981 and 2008.

In the early 1980s, Fed Chairman Paul Volcker famously tackled inflation that began in the 1970s. The central bank hit its target, but only after soaring mortgage rates—he climbed to 18% in 1981—caused a sharp housing recession, pushing the entire economy into recessionHouse prices were actually fairly stable during the 1981 housing recession, although both home sales and building levels declined.

Of course, the 2008 housing crash was another story. Unlike 1981, the 2000s housing recession was driven by a housing bubble. This slowdown began in 2005 after a series of rate hikes by the Fed. In the years that followed, it escalated into a full-blown housing bankruptcy that resulted in the Great Recession. Unlike 1981, the housing crash of the 2000s was fueled by rampant overbuilding, deteriorating household budgets, historic levels of overvaluation, and toxic subprime mortgages.

The 2022 housing market downturn fits neither of the 1981 and 2008 camps, but they share characteristics of each. As in 1981, Housing market weakens in 2022 in the face of historic mortgage rate shockAnd just like in 2008, The housing market in 2022 is once again decoupled from economic fundamentals..

A historic affordable shock. That’s the best way to explain why the housing market is “something” that breaks.

Pandemic housing boom — this US home prices have risen 43% in just two years– coupled with 7% mortgage rate It just pushed affordability beyond what many potential borrowers could afford. Relative to income, it’s actually more expensive to buy now than it was at the height of the housing bubble.

Every time mortgage rates rise, some borrowers who must meet lenders’ stringent debt-to-income ratios lose their mortgage eligibility. As mortgage rates skyrocket from his 3% to 7%, millions won’t be able to afford it.

There is no doubt about it: Housing market plunges into recession back in the summer. That said, the economic contraction has yet to reach levels expected before a Fed recession.

Something is getting in the way: housing construction.

on the one hand, Detached house construction starts It decreased by 18.5% compared to the previous year. Meanwhile, homebuilders remain busy. Supply Constraints in his chain, combined with an eagerness to capitalize on the pandemic’s housing boom, have led the homebuilder to ramp up production significantly over the past two years. That backlog is huge and they’re still working on it. And as long as builders and contractors stay busy, the surge in construction layoffs that usually precedes a Fed-driven recession will slow.

Looking ahead, economists and analysts believe the housing market will continue to deteriorate.

this year, Wells Fargo project sharp decrease in new construction sales (-10.5%), Second-hand home sales (-7.4%), detached housing starts (-7.3%), Residential GDP (-10.1%). And in 2023, wells fargo Expect further decline new construction sales (-6.5%), Second-hand home sales (-13.1%), detached housing starts (-12%), Residential GDP (16%).

If Wells Fargo’s forecast, which also predicts a 5.5% decline in U.S. home prices in 2023, comes true, it would mean that the housing market downturn would reach levels historically only seen during recessions.

A downturn in the housing market appears to be on track to push the US economy into recession, but nothing is certain. If inflation eases, he said the Fed could reverse policy before a recession is set. law its significant decline housing investment— which accounts for 4.6% of GDP — doesn’t have much of an impact on today’s economy, which is less dependent on housing. While it is true that private investment was significantly higher than his share of GDP in 2005 (6.7%), in reality he was slightly higher than his share in 1981 (4.4%). In other words, don’t underestimate housing.

However, whether it’s a recession or not, the housing industry is clearly feeling the pinch of a tightening cycle. It’s hard to see that change any time soon.

“I literally have nothing under contract. I’m a long-haul carrier, but I’d be lying if I said I wasn’t nervous,” said Philadelphia real estate agent Kira Mason. luck.

Want to stay up to date on the housing recession? Follow me twitter and @News Lambert.

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