The US housing market experienced tremendous growth during the coronavirus pandemic, creating one of the most bullish environments since that period that shall not be named more than a decade ago. Fueled by the Federal Reserve’s near-zero interest rates and changes in the broader economy, families went on a buying spree to achieve the American Dream of homeownership. Yes, even with the white picket fence. Now that the central bank is tightening monetary policy, the real estate bubble of the last couple of years is making that deflating sound. Suffice it to say, the nation’s sizzling housing industry has been doused by the dreaded “R” word: Recession.
US Housing Market Data
What is the US real estate market signaling to investors and policymakers? Well, time to put on your best Ben Stein impression, grab a calculator, and fit your white-collared shirt with a pocket protector – the data is here.
Existing home sales tumbled 5.4% to 5.12 million units in June, according to the National Association of Realtors (NAR). This represented the fifth consecutive month of sliding transactions. New residential property sales plummeted 8.1% in June to just 590,000 units, NAR numbers confirmed. Mortgage applications dropped 2.3% in the week ending August 12, the Mortgage Bankers Association (MBA) reported. Housing starts dropped by 9.6% in July to 1.446 million, while building permits slipped 1.3% to 1.674 million. The NAHB/Wells Fargo Housing Market Index plummeted to 49 in August, down from 55 and below the market forecast of 55 – anything below 50 indicates negative sentiment.
The future does not bode well for the housing sector. With soaring costs, waning confidence, and growing recession fears, the number of homebuyers backing out of deals has increased, too. A new survey by John Burns Real Estate Consulting found that the cancellation rate for new homes spiked to 17.6% in July, up from 7.5% a year ago. Most of the cancellations were situated in Texas (27%), the southwest region (25%), and Northern California (25%). Sixteen percent of existing home contracts also fell through in July.
Is this a recipe for a "severe downturn"? Credit reporting agency Fitch thinks the probability is growing, forecasting that US housing market prices could decline by as much as 15%. Sales activity could also plummet 30% over the next few years, citing recession concerns, unemployment, affordability, and consumer confidence.
“The likelihood of a severe downturn in US housing has increased; however, our rating case scenario provides for a more moderate pullback that includes a mid-single-digit decline in housing activity in 2023, and further pressure in 2024,” Fitch analysts said in the report. "Builders that do not build sufficient cash reserves in a downturn would likely need to issue debt to rebuild inventory positions in a housing recovery, which would stretch credit metrics.”
Mortgage debt could also become a significant challenge in the coming years amid rising interest rates. The Federal Reserve Bank of New York's (FRBNY) recent Household Debt and Credit Report from the second quarter found that mortgage balances surged by $207 billion to $11.39 trillion, the highest on record. Once renewal time arrives, it will not be financially easy to keep up with payments.
Is This 2006 All Over Again?
(Photo by Joe Raedle/Getty Images)
The housing bubble meltdown during the Great Recession still lingers in the back of Baby Boomers’ minds. Thanks to the Fed-induced speculative frenzy and the government facilitating the subprime debacle, the real estate market crashed the economy. Could the same thing happen again? So far, the data have been mixed.
CoreLogic recently reported that the US foreclosure rate remained close to a record low in May (0.3%), despite a tepid uptick. Loans that are more than 30 days past due eased to 2.7% year-over-year. However, mortgage technology and data provider Black Knight statistics highlight that the number of borrowers who are three or more payments past due on their mortgage has soared 55% over pre-pandemic levels, totaling 640,000.
It might be preferable to hope for the best in today's economy and prepare for the worst. The United States has slipped into a technical recession, shelter and utility costs remain extremely elevated, and business and consumer confidence levels continue to hover near record lows. Is it any wonder that more recent homebuyers have regretted their decisions? Since the US housing market is vulnerable to supply-and-demand dynamics, a sharp downturn could occur at anytime. Once again, the Eccles Building fuels a bubble that could result in decimation, destruction, and despair.
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