Does the Housing Market Slide Signal Recession?

Taking the Housing Market Slide in Stride

Here’s an attention-grabbing headline—Home Prices Are Falling Nationwide. Is the housing market signaling recession? 

Just about any way you look at the data, the housing market is cooling. Home prices declined in August for the second month in a row and at the fastest monthly rate since December 2011. That’s understandable given that mortgage rates hit a fresh 21-year high this week—the 10th straight weekly increase, topping 7% today as we go to print. The result: The fewest weekly mortgage applications since 1997. Sales of existing homes have fallen for eight straight months, with September sales the worst since 2012 (not counting the lockdown months in COVID-19’s early days).

Falling home prices conjure memories of the global financial crisis. But I don’t think we are on the verge of another housing collapse. The housing bubble of the mid-’00s was fueled by gimmicky mortgages that enabled people to buy bigger and more expensive homes than they could afford. When the music stopped (prices stopped rising), there were not enough chairs left for sellers, prices collapsed and bankruptcies ensued.

This time around, rising home prices were driven by pandemic-induced behavioral changes and a dearth of homes for sale. Home prices rising 20% year over year was never a sustainable pace. The current decline in housing will have the obvious knock-on effects across the economy—fewer jobs and fewer big-ticket purchases—but that doesn’t mean the housing market is crashing or recession is imminent.

Home Prices Fall for the First Time Since 2012
Note: Chart shows monthly change in the S&P CoreLogic Case-Shiller U.S. National Home Price Index (seasonally adjusted) from Feb. 1987 through Aug. 2022. Source: Bloomberg/S&P CoreLogic.

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