Jimmy DiCorte September 8, 2022

Newsletter - September 2022

After two quarters of economic contraction, economists are divided as to whether the U.S. is headed for a recession. But the housing industry is already there, some experts say.

“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” said NAHB Chief Economist Robert Dietz.

New home sales are down 38.5% from January, and existing home sales are down by about 26%.

What we’re seeing now isn’t a normalization after two years of a red-hot housing market, Dietz said. “This is definitely a weakening,” and it’s far from over.

The investment bank Goldman Sachs forecasts we’ll end this year with a 22% drop in new home sales, a 17% drop in existing home sales, and an 8.9% drop in housing GDP—and expects the trend to continue well into 2023.

“It was just a couple months ago the housing market was in danger of overheating,” said Redfin Chief Economist Daryl Fairweather, who called the slowdown a “necessary evil.”

For the last two years, a depleted inventory and record-low mortgage rates have fueled skyrocketing home prices, making homeownership a financial stretch for many. As the Fed started tightening rates this year in an attempt to cool inflation (and prices remained high), many would-be buyers have been pushed out of the market.

Now, with the 30-year fixed rate hovering around 5.45%, mortgage demand has hit a 22-year low, homebuilder confidence has fallen to the lowest level since May 2020, and single-family housing starts are predicted to decline for the first time since 2011.

The mortgage industry is beginning to feel the pinch. Non-bank lender First Guaranty Mortgage filed for Chapter 11 protection in June, days after laying off 471 of their 600 employees. There have also been staff reductions in the mortgage department of JPMorgan Chase and at real estate companies Compass Inc. and Redfin Corp.

The question now: Will the rest of the economy follow? Experts are divided.

“The housing market is a pretty useful barometer for where the general economy may be headed,” said Freddie Mac’s Deputy Chief Economist Len Kiefer. “It’s likely, given the slowdown in residential activity, that the overall economy will slow a little bit.”

Johns Hopkins University professor of applied economics Steve Hanke told CNBC we’re in for “a whopper of a recession in 2023.” Meanwhile, the Nobel prize-winning economist Richard Thaler says he “doesn’t see anything that resembles a recession.

According to a poll of economists last month, the U.S. has a 45% chance of recession within a year (although most said they expect it to be “short and shallow”), while Bloomberg puts the probability at 47.5%. Moody’s Analytics puts the odds of recession at 50%.

It doesn’t feel like a recession now, said Minneapolis Fed President Neel Kashkari. But “can we continue to bring inflation down without triggering a recession? I don’t know,” he said.

Looks like we’ll have to wait and see what the NBER says.

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