The US economy is not yet in recession, although some analysts think it is heading there. The job market remains strong and consumer spending is holding up. If there is a recession in 2023, it will likely be mild.
The real estate market is on a much wilder ride. The rapid rise in interest rates this year, triggered by the Federal Reserve’s aggressive inflation-fighting regime, was destined to end an epic housing boom. Sales of existing homes, which account for the bulk of real estate activity, have fallen for eight straight months. That’s the longest losing streak since 2007 — the fateful year the housing bubble that led to the 2008 financial meltdown began to burst.
A leading indicator of builder confidence has dropped to the lowest level since 2012, excluding a brief dip during the 2020 COVID outbreak. That was the low point of the last housing meltdown. “After being a major boost to growth and inflation between the start of the pandemic and now, housing will be a major hurdle for both in the coming year,” Comerica Bank wrote to customers Oct.
Nobody thinks that home destruction on the scale of the last seizure is coming. There are no millions of bad loans pushing lenders out of business or waves of foreclosures putting unsalable inventories on the market. In fact, the housing stock remains extremely low, with insufficient homes to meet demand.
But buyers and sellers are now facing a unique set of problems that could cause months of pain before the market corrects. That adds to the gloom that depresses consumer confidence and certainly doesn’t help President Biden and his fellow Democrats in the final weeks before the 2022 midterm elections.
So far this year, the average 30-year fixed-rate mortgage rate has risen from less than 3% to nearly 7%, dramatically increasing the cost of paying off a mortgage. That’s knee demand for homes. The National Association of Realtors expects existing home sales to drop 15% this year, with new home sales down 21%.
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Depressed demand usually drives prices down, and this will undoubtedly happen over time. But not quickly. Home prices are just starting to fall, with the S&P/Case-Shiller National Home Price Index down 0.2% from June to July. Since the COVID outbreak accelerated demand for homes in 2020, prices have still increased by 40%. Nobody has slack when prices drop a fraction of a percentage point.
Right now, it’s the worst of all worlds. Zillow says home affordability is the worst in at least 15 years, with home prices 25% higher than levels that would return affordability to historic norms. Worse, Zillow says, “The stock outlook suggests the market will be tight for years to come.” Expensive homes can also drive up rents, as fewer owners means more demand for rental properties and more pricing power for homeowners.
Housing is not like a regular product, where producers adjust supply based on demand and markets reach an equilibrium price quickly. That’s because supply cannot be adjusted up or down by adjusting the speed of an assembly line. Allowing restrictions and other factors make it difficult to build new construction in many areas. Builders faced acute labor shortages, making construction difficult even if the permit is secured. Another problem: Millions of homeowners who refinanced their mortgages when rates were near record lows don’t want to give up that bargain by selling, even if they have compelling reasons to move. This keeps more supply out of the market.
Awful home accessibility isn’t bad for everyone. This doesn’t bother homeowners who don’t want to sell, and many of them are in better financial shape because of the money they saved by refinancing. Lower levels of housing activity generally correspond to lower sales of furniture, appliances and renovation services, but that might not be a bad thing given the increase in demand for these things over the last couple of years – one of the drivers of inflation. current rate of 8.2%.
But housing affordability is still a national issue that prevents many Americans from building wealth and may even threaten homelessness for low-income Americans. A major real estate downturn can be an economic shock in itself.
Biden isn’t pushing to solve the campaign’s housing problems in the same way he’s pulled every possible lever to drive down gas prices in recent months. High gas prices affect everyone who drives a car, and even some who don’t, announcing inflation in marquee fashion at every gas station. Nobody sees house prices while they drive, and if they do, most people don’t have a mental index of what’s a good price and what’s a bad price, like they do with gasoline.
The housing collapse, instead, may be contributing to a sense that the economy is shaky under Democrats who control Congress and the White House. Despite many problems in the GOP, voters still feel that Republicans do a better job of handling the economy, which seems likely to help the GOP regain one of the two houses of Congress in the midterm elections. Maybe they have ideas for fixing the housing market.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman
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