The United States is in a real estate recession. Here’s what that means

The once scorching housing market has cooled so rapidly in recent months that some experts actually believe the industry has fallen into a recession.

Painfully high inflation and rising borrowing costs have proven to be a deadly combination for the housing market, forcing would-be buyers to cut spending.

A slew of new economic data released earlier this month shows the sector beginning to slow significantly: Homebuilders’ sentiment towards the industry has plunged to the lowest level in two years, and buyers are pull off the market as they cancel home sales as soon as possible. pace since 2020 and builders are rethinking construction.

“We are seeing a real estate recession in terms of declining home sales and construction,” Lawrence Yun, chief economist for the National Association of Realtors, said recently.

HOW HOUSING IS FEEDING HOT INFLATION

A For Sale sign is displayed in front of a property in Monterey Park, California on August 16, 2022. (FREDERIC J. BROWN/AFP via Getty Images/Getty Images)

But the recession plays out differently for buyers and sellers. Demand is drying up, but prices remain high because supply is still limited. With mortgage rates soaring and a growing number of potential buyers pulling out of deals – and decrease of sales at the lowest level in two years – builders have become increasingly reluctant to build new homes, keeping prices high.

“It’s not a house price recession,” Yun said. “Inventory remains tight and prices continue to rise nationally, with nearly 40% of homes still showing the full list price.”

Builders’ housing market sentiment fell in August to the lowest since the start of the COVID-19 pandemic, signaling a market slowdown, according to the National Association of Home Builders/Wells Housing Market Index. Fargo, which measures the pulse of the single-family housing market.

The gauge fell for the eighth straight month to 49, marking the worst stretch for the housing market since the 2008 financial crisis. Any reading above 50 is seen as positive; the gauge hasn’t entered negative territory since a brief – but steep – drop in May 2020.

“The Federal Reserve’s monetary policy tightening and persistently high construction costs have resulted in a housing recession“said NAHB Chief Economist Robert Dietz.

The index has fallen significantly from just a year ago when it stood at 80. It peaked at a 35-year high of 90 in November 2020, supported by historically high interest rates. low at the same time that American shoppers – full of cash and eager for more space during the pandemic – began to flock to the suburbs.

The interest rate sensitive housing market has begun to calm significantly in recent months as Federal Reserve decides to tighten policy at the fastest pace in three decades and withdraws its support for the economy. Policymakers already approved a 75 basis point rate hike in June and July and signaled another big hike was on the table when they met in September.

The total labor force is now about 600,000 people lower than it was at the start of 2020, just before widespread COVID-19 restrictions plunged the economy into a recession.

Homes under construction in the Norton Commons subdivision in Louisville, Kentucky, USA, Friday, July 1, 2022. (Photographer: Luke Sharrett/Bloomberg via Getty Images/Getty Images)

HOME BUILDERS SEE ‘HOUSING RECESSION’ AS SENTIMENT DIPS TO NEW 2-YEAR LOW

The number of home sales cancellations soared in July to a new two-year high as buyers retreated from the market. Around 63,000 home purchase contracts were canceled in July, or 16% of homes that entered into a contract that month, according to new Redfin analysis released on Tuesday. This represents an increase from the 15% of transactions that collapsed in June and is the highest rate in more than two years.

“Buyers are also nervous because they fear a potential recession could drive home prices down,” said Jacksonville, Fla.-based Redfin real estate agent Heather Kruayai. “They don’t want to end up in a situation where they’re buying a house, and it’s worth $200,000 less in two years, so some are choosing to wait in hopes of buying when prices are lower. “

With the housing market deteriorating, sellers are pressured to lower their asking prices. Goldman Sachs economists predicted in an analyst note last week that the housing market will “continue to fall” and that house price growth will “slow sharply over the next two quarters.” Economists have predicted that house price growth will stop in 2023.

It comes as consumers face higher mortgage rates, which rose sharply in the first half of the year as the Fed began raising rates but cooled in recent weeks amid growing fears about the state of the American economy and the threat of an impending recession.

However, rates rose again last week after Fed Chairman Jerome Powell gave a speech in which he promised to fight inflation “mightily” regardless of the potential economic fallout.

“While higher interest rates, slower growth and looser labor market conditions will reduce inflation, they will also hurt households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”

Fed Chairman Jerome Powell

U.S. Federal Reserve Chairman Jerome Powell, from right, Lael Brainard, Deputy Chairman of the Board of Governors of the Federal Reserve, and John Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, durin (Photographer: David Paul Morris/Bloomberg via Getty Images/Getty Images)

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The average rate of a 30-year fixed mortgage rate climbed to 5.66% for the week ending September 1, according to recent data from mortgage lender Freddie Mac. This is significantly higher than just a year ago, when rates stood at 2.88%.

The weakening housing sector is a big deal because it plays such an important role in the broader U.S. economy: Housing spending accounts for about 18% of the country’s GDP, the broadest measure of goods and services produced in the country.

“Housing has clearly moved from a tailwind to a headwind for the US economy,” said Bill Adams, chief economist at Comerica Bank. “That will likely subtract real GDP growth for next year.”

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