The US housing market is in recession.  Will the economy follow soon?

The US housing market is in recession. Will the economy follow soon?

The last time the housing market collapsed in 2006, it took the entire US economy with it. But the story never follows the exact same scenario twice.

The weakening of the housing market will undoubtedly hurt the economy. Housing construction fell at an annual rate of 1 million in May from a 15-year high of 1.31 million in December. Permits to build more homes also collapsed.

It will probably get worse as well.

Housing prices had already hit a record high when the US Federal Reserve in March began raising interest rates rapidly to combat high inflation. The central bank’s aggressive energy pushed the 30-year fixed mortgage loan to more than 6% from just 2.75% last fall.

The combination of more expensive mortgages and extremely high prices has made it difficult for most buyers to buy a home. Affordability has fallen to its lowest level in 16 years, the National Association of Brokers said.

As far as housing goes, so does the US economy, according to an old saying. The resulting slowdown in construction is going to remove a large chunk of growth from Gross Domestic Product in the second quarter. And fewer sales means fewer new homeowners who spend money to furnish their homes.

However, the housing market is very different now than it was in 2006, and by itself, it is unlikely to lead the economy into a ditch. The US may well sink into recession in the next year or two, economists say, but housing will not be the main cause.

“We expect sales to fall further in the coming months, but we do not expect a repeat of the 2000 collapse,” said Alex Pelle, a US economist at Mizuho Securities.

Small sign of a bubble

The housing market today bears little resemblance to the go-go of the 2000s.

First, the typical buyer has a high credit score and is less likely to go bankrupt. Only about 2% of all new mortgages are granted to buyers called subprime or those with lower credit scores.

By contrast, about 15 percent of borrowers had subprime credit at the height of the housing bubble nearly two decades ago, according to a Wall Street Jefferies survey.

Many of these borrowers lost their homes in the 2007-2009 recession and real estate values ​​plummeted, robbing millions of Americans of paper and making them feel poorer. A huge selloff in the stock market was added to their woes.

The negative “wealth phenomenon” contributed to the sharp decline in consumer spending that deepened the recession. Consumers account for almost 70% of everything that happens in the economy.

The current slowdown in housing, however, is unlikely to lead to falling prices and lower house prices.

For a start, the US has been suffering from homelessness for years, even as the number of new families being formed has pushed demand to new heights. The pandemic has also dramatically increased the number of people working from home and shouting for more housing.

Demand for housing is strong in part “due to rising distance work and lifestyle changes,” said Comerica Bank chief economist Bill Adams.

Builder has tried to meet most of this demand. Construction of new homes and rental units rose at an annual rate of 1.8 million in April – a 16-year high – before the actual mortgage rates really started. smaller.

It is not going to improve very soon, either. Construction declined sharply in May and is likely to continue to slow, further reducing the supply of homes for sale and maintaining upward pressure on prices.

Silver linings

However, high house prices are not bad at all, especially for those who already have their own home. Stable home values ​​can partially isolate the economy from the recession.

How come? Homeowners are likely to feel better financially than in 2006 because their main nest egg is still valued.

In addition, millions of homeowners took advantage of historically low interest rates during the pandemic to refinance and save a package. Most of them also opted for fixed mortgages, leaving them unaffected by rising interest rates.

This was not the case in the mid-2000s, when half of all mortgages were regulated. Rising interest rates are forcing millions of homeowners to pay high monthly mortgage costs, and many who could not afford it are failing.

Now only about 10% of all mortgages are regulated. In addition, the percentage of income that homeowners have to devote to their mortgages is at an all-time low.

“The link between housing and consumption is likely to be weaker than in the past,” said Aneta Markowska, chief economist at Jefferies.

What could be a bigger blow to the housing market is a large increase in unemployment that is causing more people to go bankrupt.

However, with the unemployment rate at just 3.6% and the labor shortage that is expected to continue for years, some economists question whether companies will resort to mass layoffs if the US enters a recession.

Meanwhile, the housing market is still relatively well maintained despite rising interest rates and high prices. Sales and construction costs are close to pre-pandemic levels, indicating that the bottom will not fall as it did in 2006.

Of course, some experts said the same thing 15 years ago. “Researchers say the recent housing downturn does not necessarily mean an end to economic growth,” an article in The Christian Science Monitor said at the time.

What followed was the worst recession in decades.

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