: Is the housing market in a recession? Here’s what economists are saying

United States

The housing market is cooling off. After two years of red-hot sales, economic data paints a tale of a market that’s seeing weaker sales, plunging sentiment among homebuilders, and rising mortgage rates. 

But economists are divided over whether the U.S. housing sector is in a recession.

Some economists say it is.

Given that the decline in housing activity is across the economy and has lasted for more than a few months, “many housing indicators do point to a recession in the U.S. housing market,” Selma Hepp, deputy economist at CoreLogic, told MarketWatch.

Just like how Freddie Mac’s Len Kiefer predicted in early June, the housing market has contracted significantly.

With the Federal Reserve hiking interest rates, housing starts and existing home sales have fallen by 20% this year compared to 2021, Hepp noted.

‘All of this does point to a growth recession in housing, though outright recession … is still unlikely.’

— Selma Hepp, deputy economist at CoreLogic

Sellers are adjusting list prices to reflect demand: About a third of homes listed for sale on Realtor.com in some markets like Reno, Nevada, and Austin, Texas, are having prices cut due to weakening demand.

And with home builder waning as well, “residential investment, the measure of housing-related activity included in GDP, declined at about 12% annual rate in the second quarter” and is likely to fall again in the third and fourth, Hepp said.

“All of this does point to a growth recession in housing, though outright recession … is still unlikely,” she added.

Chris Low, chief economist at FHN Financial, felt more strongly that housing was in a recession.

“Housing is a leading indicator of the broad economy. I would say housing is in a recession, and that likely means the rest of the economy will be in a recession soon,” he said in an email to MarketWatch.

But deciding that the housing market is in a recession is not common practice, Nancy Vanden Houten, lead U.S. economist at Oxford Economics, said.

“We are seeing weakness right now in the major housing indicators and we expect the residential sector to be a drag on GDP growth over the next several quarters,” she said, “but we don’t declare on the basis of that, that the housing market in isolation is in recession.”

Richard Moody, SVP and chief economist at Regions Financial Corporation, agreed with her assessment.

“I’m not really sure what it means to say ‘the housing market is in a recession’,” he said.

Normalizing vs. collapsing

While the data has been weaker, demand hasn’t dissipated, he pointed out. So it could be that the “market is simply normalizing,” Moody said, “rather than collapsing.”

Besides, the housing market is undersupplied.

For instance, existing homes listed remained on the market for 14 days, according to the National Association of Realtors. That’s a record low, according to the realtors, since they began tracking it in 2011. That may mean that there are buyers on the sidelines who may be waiting for opportunities now, despite higher borrowing costs.

These data points suggest that rather than the housing market collapsing, Moody stressed, the market is more likely normalizing. Unless that re-stabilization overshoots. 

Recession or no recession, that doesn’t reflect on how home prices will grow (or not) over the next few months, one economist said.

“I wouldn’t say we’re in a housing market recession,” Sam Hall, assistant property economist at Oxford Economics, said. 

But the data adds “to the evidence that house-price growth has peaked,” he added. “We are forecasting a small fall in prices, with house-price growth bottoming out at -5% [year-over-year] by mid-2023.” 

Given that home prices in the 20 biggest cities in America grew 20.5% year-over-year in May, according to the Case-Shiller index, which despite slowing is still a big increase, a drop of 5% is a big reversal. 

Write to MarketWatch reporter Aarthi Swaminathan at aarthi@marketwatch.com

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