While the U.S. economy at large has yet to reach downturn status, commentary from First American Financial said the housing market has been in its own recession since May, and it is actually a double-dip recession.
The title insurer’s housing recession indicator model is based on the National Bureau of Economic Research Business Cycle Dating Committee’s determination of downturns based on eight economic indicators.
Based on that methodology, the U.S housing market entered into recessionary status in May, declared Mark Fleming, First American’s chief economist.
It was also in recession between May and November 2022, but exited when mortgage rates declined after topping 7% last fall and the new home sales market recovered, he found.
“The resurgence in mortgage rates, constrained affordability, a slowing pace of sales, fewer residential housing jobs and less residential housing investment returned the housing market to recession,” Fleming said in a press release for First American’s Potential Home Sales Model report for August.
The banner year for home sales was 2021, with a fall-off in 2022 that has continued into 2023, noted Selma Hepp, chief economist at CoreLogic in an interview.
This is because of the rapid rise in mortgage rates along with inventory issues, she said, agreeing with Fleming.
A recent Fitch Ratings report that noted over 80% of U.S. metro areas had home prices that were overvalued compared to sustainable norms.
The last double-dip housing recession was during the Great Financial Crisis, Fleming pointed out, with the pause taking place between July and November 2009, when mortgage rates fell to 4.7% from 5.5%.
“The GFC double-dip and the current double-dip highlights the sensitivity of the housing market to mortgage rate volatility,” Fleming said. “Sales, affordability, residential construction and the real estate-related labor market are all sensitive to mortgage rate trends.”
Hepp remarked on the vast difference in the size of the inventory in the current housing market compared to that of the Great Recession.
“Coming into the Great Recession, there were some 4 million existing homes available for sale,” said Hepp. “And now we have less than a million homes.”
Furthermore, while prices are still at near-peak levels, before the 2009 recession, values hit their highs in 2006. That translates into more equity for current owners.
Plus, in 2009 unemployment grew, whereas currently, the labor market is resilient and actually helping what’s happening in housing, Hepp said.
That makes certain comparisons between the two eras difficult.
“So it’s a crisis, but due to a different sort of set of circumstances,” Hepp said.
The First American model determined existing sales would run at a 5.34 million seasonally annualized rate in August, a 0.2% decrease from July.
Compared with August 2022, the market potential was 191,000 SAAR units lower, a decline of 3.4%.
“Existing-home sales will have a tough time gaining real momentum in a limited inventory environment where most homeowners are rate-locked into their homes,” said Fleming. “A higher mortgage rate environment resulting in limited sales helps to explain why the housing market has slipped back into a housing recession.”
Industry forecasters are expecting mortgage rates to moderate later this year, especially if the Federal Open Market Committee ends the current tightening program and investors have more certainty. A U.S. economic recession will also result in mortgage rates, which have been above 7% for five consecutive weeks. First American expects rates to remain elevated for the rest of the year, between 6.5% and 7.5%, Odeta Kushi, deputy chief economist, said in a recent report.
General expectations are that the FOMC will not raise rates at its meeting on Tuesday and Wednesday, although future hikes are not off the table. After pausing in June, the FOMC pushed short-term rates 25 basis points higher at its last meeting in July.
Mortgage rate stability is the key to the immediate future of housing, Fleming said.
“Until mortgage rates come down, I think we’re going to be in a sort of a stalemate for the housing market,” added Hepp. “Because lower mortgage rates will also unlock that inventory.”