Tight monetary policy to contain inflation in the United States has dampened the red-housing market seen in 2020-2021, when historically low mortgage and home scarcity collided with a surge in buyer demand.
With higher mortgage rates now in the area of 5.5%-6% for a 30-year fixed rate mortgage, demand has cooled off significantly in 2022 and the skyrocketing home price increases of the previous two years are coming back down to earth.
But some analysts believe the corrective measures taken by the Federal Reserve have sent the U.S. housing market into a recession.
A report from Barron’s on Monday spells out the decline in home sales activity. In July, existing home sales came to a seasonally-adjusted annual rate of 4.81 million, which is the lowest mark since 2015. New home sales are at their lowest level since 2016.
“We’re witnessing a housing recession in terms of declining home sales and home building,” Lawrence Yun, chief economist at the National Association of Realtors, said earlier this month.
For many home buyers who have found themselves priced out of the market, a slowdown is not necessarily unwelcome news — although the wider effect on the U.S. economy could be painful as some would-be home renovators hit pause on the idea of upgrading in order to sell.
Despite the slowdown, buyers likely are not yet feeling the advantages. From Barron’s:
The slowdown is likely little balm for buyers priced out of the market, since the pullback is largely due to a lack of home affordability, instead of erosion of underlying housing demand. At last week’s average rate of 5.55%, the median home would cost nearly $650 more a month to purchase today compared with the same period last year, according to Redfin. Plus, recent data show that sellers have begun to pull back on new listings, limiting options for potential buyers.
One of the upshots of the housing market surge during the pandemic is that many U.S. homeowners are now “house rich and cash poor,” per a recent survey from U.S. News & World Report. Those who bit on high home prices because the mortgage rates were low are now feeling the impact of inflation on the other side of homeownership, while those who want to buy are hit by both inflation and mortgage rates that make buying a home cost prohibitive, even with prices cooling.
It’s unsurprising, in this context, that 84% of Gen Z Americans surveyed by Consumer Affairs actively want a housing bust. They view it as perhaps one of the only viable paths to reset the market and make home ownership affordable for them over the next 5-10 years.
In the same survey, 78% of Americans said they expect a housing crash is coming along with a wider economic recession some time in 2023.
It seems that sentiment around the U.S. housing market is trending in a pessimistic direction, even if the irony is that this outlook is rooted in an affordability crisis that some feel will only be solved by a larger downturn. It’s always notable when housing market experts begin to use the language of recession. It confirms that public perception is not far from the reality.