This is a big deal because housing spending accounts for up to 18% of GDP and the sector generally leads the recovery. So even if the Biden administration promotes labor market strength and consumer spending holds up, a sustained downturn in the housing market could exacerbate any potential recession on the horizon for the US economy.
As the primary way most Americans build wealth, home ownership has long played a central role in the economy. It took on additional weight during the pandemic, bolstering the turbulent times when American office workers fueled demand by looking for more spacious homes between blocks and work-from-home policies. Record mortgage rates encouraged the surge in purchases, and homeowners rushed to refinance their loans, giving them a more stable financial foothold to withstand the volatility led by Covid.
While home prices fell last month for the first time in three years, they are still on the rise from a year ago thanks to skyrocketing growth over the course of the pandemic. But the rise in mortgage rates, driven by Fed rate hikes, has put many would-be buyers out of business.
In a note on Tuesday warning that the housing market is “falling further,” Goldman Sachs economists predicted that home price growth “will slow sharply over the next two quarters” and drop to 0% in 2023.
The deterioration in the market has prompted sellers to cut asking prices. More than a fifth of homes for sale experienced a price drop in July, according to Redfin, the highest level the company has recorded since it began tracking data in 2012.
“House prices have been high during this monetary policy shift, and this is a major interest rate shock we’re seeing,” said Brian Coulton, chief economist at Fitch Ratings. “We are heading towards a slowdown driven by monetary tightening and construction will suffer more than the economy in general.”
No one is really sure how bad it will go, Coulton said, as the Fed also shrinks the portfolio of assets it bought to revive the market in an effort to counter inflation.
The central bank had injected nearly $ 3 trillion into the mortgage market by purchasing mortgage-backed securities in a process known as “quantitative easing.” Now he’s allowing those stocks to mature and fall off his balance sheet, and he’s left the door open to sell them as a way to shrink his portfolio more quickly.
“Nobody knows how much property prices, not just in the United States, but globally, have been increased by quantitative easing,” Coulton said. “But I think there’s a pretty strong consensus that QE has pushed up asset prices, and especially property prices, and now we’re going the other way around, and no one has a particularly good model of what it’s going to be like.”
It won’t be cool, according to Douglas Holtz-Eakin, an economist and chair of the right-wing American Action Forum who recently tested the market before the Senate Banking Committee.
“Housing will disproportionately bear the brunt of this disinflation and the next two years will be difficult,” Holtz-Eakin, who previously headed the Congressional Budget Office, said in an interview.
But it could be worse, according to Jeff Tucker, Zillow’s senior economist. Tucker indicated that inventory growth has been stabilizing in recent weeks as sellers begin to reconsider putting their homes up for sale. New listings fell 2.8% in July, according to data from Realtor.com.
“This tells me we’re not on a slowdown on the run towards an accident,” Tucker said. “There is this kind of withdrawal of supply after the withdrawal of demand earlier this summer and I think it is somehow hindering the market from seeing prices drop substantially.”
What happens next depends on whether the Fed can manage price growth and, if so, the economy at large in a recession. Fed Chairman Jay Powell warned on Friday that the campaign to curb inflation would cause “some pain. [for] families and businesses “.
The strength of the housing recovery “will really depend on the trajectory of the economy,” said Daryl Fairweather, chief economist at Redfin.
Once inflation subsides, he said, mortgage rates will drop and demand for housing will return – there are still not enough homes for the people who want them, so demand is resilient. The supply of existing homes for sale has increased this year but remains below pre-pandemic levels.
“Things are likely to change in the next year, but I’m not sure how positive a turnaround will be, whether it will return to full swing or be a lackluster recovery due to the economic environment,” Fairweather said.
“It was just a couple of months ago that the housing market was in danger of overheating,” he added. “This is definitely a necessary evil in some sense.”