A spate of negative housing market reports is raising fears that the sector is beginning to drag the wider economy into a recession.
The latest bad news was that sales of existing homes plunged 5.9% in July, a sixth straight month of declines, according to a report Thursday from the National Association of Realtors.
Sales are down a whopping 20.2% from a year ago and have accelerated in recent months. In fact, the last time that existing home sales plummeted this quickly was when the housing bubble burst in 2007, according to Chris Rupkey, chief economist at FWDBONDS. The bubble bursting paved the way for the Great Recession.
Desmond Lachman, a senior fellow at the American Enterprise Institute who has been warning for months that the housing market is in a bubble, told the Washington Examiner that what the economy is witnessing right now is that bubble bursting, although he said the damage to the economy won’t be as bad as what was experienced more than a decade ago.
EXISTING HOME SALES PLUNGE TO LOWEST LEVEL IN MORE THAN TWO YEARS
“The housing market is clearly in recession, and that’s because all the indicators, kind of whatever you look at, are down quite a lot from last year,” Lachman said. “Mortgage borrowing is down, the housing starts are down, building confidence is down, housing affordability is down. It’s giving you unambiguous signs that we’re getting a lot of weakening in the housing market.”
The week started out with some bad housing news when the National Association of Home Builders announced that builder confidence in the market for newly built single-family homes plunged 6 points this month to fall into negative territory for the first time since a brief period at the start of the pandemic.
The eight straight months of falling homebuilder confidence is the longest such period of decline since the housing market crash more than a decade ago.
“Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession,” said NAHB Chief Economist Robert Dietz. “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011.”
About 1 in 5 of the homebuilders surveyed reported slashing prices in the last month to limit cancellations or increase sales, while nearly 70% blamed rising interest rates for declines in housing demand.
The housing market is the most sensitive to the Fed’s interest rate hike because of how the process affects mortgage rates.
The Fed has been on its most ambitious tightening cycle in recent history. As inflation has continued to be stubbornly high, the central bank’s monetary policy has become increasingly hawkish.
After an unprecedented two years of interest rates at near-zero levels, the Fed began raising rates in March and has swiftly raised rates its target all the way to 2.25% to 2.5%.
As a result of the hiking, mortgage rates have soared. At the end of 2021, the average 30-year fixed-rate mortgage was hovering around 3%. As of Thursday, it was 5.13%, up more than 2.6 percentage points from a year before, according to Freddie Mac.
Lachman explained that the housing market declining portends recession because its effects ripple out into all parts of the broader economic landscape.
“The housing market is slowing, and as it slows, that spreads to the rest of the economy,” Lachman said. “The builders will get laid off, then they won’t go to restaurants, they won’t buy goods, and so on.”
More news that the housing market is in fast retreat came on Tuesday when the Commerce Department released a report finding that housing starts declined by a hefty 9.6% to a 1.45 million annualized rate in July. Additionally, permits to build, which are seen as a proxy for future construction, decreased by 1.3% in July, further adding strain to the housing market.
“Net, net, housing permits have been shrinking every month since the first Fed rate hike in March this year as home builders know what’s what and which way the winds are blowing,” said Rupkey. “Recession has come to the residential construction markets right on schedule, as interest rate-sensitive housing is the first sector to turn down when soaring mortgage rates make it more costly for home buyers.”
Despite all the negative effects that the Fed’s rate hiking is having on the housing market, the central bank’s action appears to be working as planned. The goal of the Fed’s historic tightening cycle is to crush inflation, which has been far stickier than anticipated.
Fed Chairman Jerome Powell and other top central bank officials have been messaging that they will continue to hike rates aggressively until prices start to come down.
The most recent consumer price index numbers showed that inflation didn’t increase from June to July, although it is still an explosive 8.5% higher than a year ago. The reading was better than many economists had anticipated but is still magnitudes higher than the central bank’s 2% inflation target.
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Home prices, which have risen at a blistering pace since the pandemic, notched their first month-over-month decline since January, a sign that the Fed’s action is beginning to drive down soaring housing prices.
“Slightly more supply and slowing buyer demand is leading to a softer pace of home price appreciation,” said economists with Wells Fargo on Thursday. “On a month-over-month, not seasonally adjusted basis, median single-family prices declined by $10,300 to $410,600. Still-tight supply is likely to support home values, but further moderation in terms of yearly gains appears on the horizon.”
