Lending reports

A series of bad reports show that the housing sector is plunged into “recession”

A The flurry of negative reports on the housing market is raising fears that the sector is beginning to drag the entire economy into a recession.

The latest bad news is that existing home sales fell 5.9% in July, a sixth straight month of decline, according to a report released Thursday by the National Association of Realtors.

Sales fell 20.2% from a year ago and have accelerated in recent months. In fact, the last time existing home sales fell so quickly was when the housing bubble burst in 2007, according to Chris Rupkey, chief economist at FWDBONDS. The bursting of the bubble paved the way for the Great Recession.

Desmond Lachman, a senior fellow at the American Enterprise Institute who has been warning for months that the housing market is in a bubble, told the Washington Examiner that what the economy is witnessing right now is the bursting of the bubble, although he said the damage to the economy will not be as severe as it was over a decade ago .


“The housing market is clearly in a recession, and that’s because all the indicators, no matter what you look at, are down from last year,” Lachman said. “Mortgage borrowing is down, housing starts are down, confidence building is down, housing affordability is down. This gives you unequivocal signs that the housing market is weakening a lot. »

The week started with bad housing news when the National Association of Home Builders announced that builder confidence in the market for newly built single-family homes plunged 6 points this month to fall into negative territory. for the first time in a brief period at the start of the pandemic.

The eight straight months of falling homebuilder confidence is the longest period of decline since the housing market crash more than a decade ago.

“The Federal Reserve’s monetary policy tightening and persistently high construction costs have caused a housing slump,” said NAHB chief economist Robert Dietz. “The total volume of single-family housing starts will show a decline in 2022, the first such decline since 2011.”

About 1 in 5 homebuilders surveyed said they had cut prices in the past month to limit cancellations or increase sales, while nearly 70% blamed rising interest rates on lower demand for accommodations.

The housing market is most sensitive to Fed interest rate hikes because of how the process affects mortgage rates.

The Fed has begun its most ambitious tightening cycle in recent history. While inflation has remained stubbornly high, central bank monetary policy has become increasingly hawkish.

After two record-breaking years of near-zero interest rates, the Fed began raising rates in March and quickly raised its target rates to as low as 2.25% to 2.5%.

Following the hike, mortgage rates soared. At the end of 2021, the average 30-year fixed-rate mortgage hovered around 3%. On Thursday, it was 5.13%, up more than 2.6 percentage points from a year earlier, according to Freddie Mac.

Lachman explained that the decline in the housing market portends a recession as its effects ripple through all parts of the broader economic landscape.

“The housing market is slowing down, and as it slows down, that spreads to the rest of the economy,” Lachman said. “Builders will be fired, then they won’t go to restaurants, they won’t buy goods, etc.”

More news that the housing market is shrinking rapidly came Tuesday when the Commerce Department released a report finding housing starts fell 9.6% to an annualized rate of 1.45 million in July. Additionally, building permits, which are seen as a proxy for future construction, fell 1.3% in July, further adding pressure to the housing market.

“Net, net, housing permits have fallen every month since the Fed’s first rate hike in March of this year, as homebuilders know what’s what and which way the winds are blowing,” Rupkey said. . “The recession has hit homebuilding markets as expected, as interest-rate-sensitive housing is the first sector to fall when soaring mortgage rates make it more expensive for homebuyers.”

Despite all the negative effects the Fed rate hike is having on the housing market, central bank action seems to be working as expected. The objective of the Fed’s historic tightening cycle is to crush inflation, which has been much more rigid than expected.

Fed Chairman Jerome Powell and other senior central bank officials have signaled they will continue to raise rates aggressively until prices begin to decline.

The latest consumer price index figures showed inflation did not rise from June to July, although it was still an explosive 8.5% from a year ago . The reading was better than many economists had expected, but it is still well above the central bank’s 2% inflation target.


House prices, which have risen at a blistering pace since the pandemic, posted their first month-over-month decline since January, a sign that Fed action is starting to bring down the surge in house prices .

“The slightly larger supply and slower demand from buyers is causing home price appreciation to slow,” Wells Fargo economists said Thursday. “On a monthly and unadjusted basis, median single-family home prices fell $10,300 to $410,600. Still tight supply is likely to support home values, but further moderation in annual gains is on the horizon.