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Housing Market Is Already In Recession

Scott Anderson
Chief Economist
Bank of the West

The housing market – which boomed during the pandemic as homebuyers yearned for larger homes with more space in the suburbs and in lower cost states– has gone into a deep freeze amid falling demand on higher mortgage rates, unsustainable home price growth, and low and worsening affordability.

Existing home sales – which are around 90% of total home sales – were running at an annual rate of about 5.5 million units just prior to the pandemic in early 2020. Existing home sales surged in the aftermath of the pandemic to well above 6.0 million units in most months from August 2020 through January 2022. Since then, housing demand and existing home sales have plunged as 30-year fixed rate mortgage rates climbed to 5.52% by June 2022 from 3.10% in December 2021. Existing home sales have dropped for six consecutive months, from 6.5 million units in January to just 4.8 million in July. Excluding the pandemic shutdown months, this is the lowest rate of existing home sales since 2015. The problem for the housing outlook is that the Federal Reserve is not done hiking interest rates to destroy demand and bring down inflation that remain near 40 year highs.

Existing Home Sales Have Fallen For Six Straight Months
Inventory shortage is no longer a problem. Scarce new and existing inventory played a crucial role in the stratospheric rise in home prices as supply was not able to keep pace with rampant demand. The months’ supply of existing homes at the current sales pace surged from 1.6 in January 22 – the lowest on records that begin in January 1999 – to 3.3 in July. New home inventories have surged even more to 10.9 months of inventory from 6.0 months in February.

Months’ Supply Has More Than Doubled Since January
The sharp increase in new and existing inventories is already beginning to manifest itself in home prices, which is normally the last housing indicator to turn down in a housing recession. The median existing home price has climbed by double-digit rates year-on-year for the last 24 months on strong demand and lean inventories. However, the year-on-year growth rate of 10.8% in July is the smallest advance since July 2020. Double-digit home price gains will be unsustainable going forward. Indeed, year-on-year home price growth is expected to turn negative by the fourth quarter of 2023.

Home Price Growth Is Beginning To Moderate
The near-term outlook for existing home sales remains dark. Pending home sales, a leading indicator of existing home sales, declined another 1.0% in July after plunging 8.9% in June. Pending home sales have tumbled in eight of the last nine months and are down 22.5% from a year ago. Clearly, there isn’t any momentum in the sales pipeline that points to a rebound in home sales in the near term. The housing recession remains firmly in place.

Housing Market Outlook Continues To Darken
So where does the housing market go from here? The long-anticipated recession in the housing market has begun and is not yet over. We are forecasting existing home sales to plunge 15.8% and 14.9% respectively 2022 and 2023 – the largest home sales decline since 2007. The main causes of the steep drop is the worst housing affordability since 2006. Also contributing to the sharp slowdown is the uncertainty looming over the economic outlook. The increasing risk of a recession that causes more unemployment will cause prospective homebuyers to hit the pause button on a major purchase.

Existing Home Sales Forecast To Decline Next Two Years
The sharp plunge in home sales over the next two years will push home prices lower, but with a lag. We expect year-on-year home price growth based on the Case-Shiller Index to moderate to 12.7% by the fourth quarter of 2022 and slip to -1.0% by the first quarter of 2024. More severe home price declines in the 5 to 10% range can be expected in many metro area markets, and some markets will see average declines of 10-15%. Risks to our home price forecasts remain to the downside given the sharp collapse in housing demand that is already well underway.

To learn more, check out this week's U.S. Outlook Report.

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