Recession? What Recession? A Look at How the Housing Market Saved Us From Crisis

Posted by Scott Jacobs, Broker on Friday, May 12, 2023 at 3:29:46 PM By Scott Jacobs, Broker / May 12, 2023 Comment

Forget the stock market - the real indicator of a looming recession lies in the bustling world of residential property.

Lucky for us, recent data suggests that the housing market has shown improvement since February, signaling a potential return to stability after a period of economic stress.

Experts predict that this could mean we've evaded the worst of a potential recession, and some even believe that the Federal Reserve might achieve the elusive "soft landing" by quilling inflation without raising unemployment rates. Fingers crossed, folks.

Consumer spending has reached its peak and The Fed is tapping the brakes on future rate hikes. Finally, those pesky hikes that started last year are coming to a stop. And hold on to your hard hats, folks- the housing market is bouncing back from a slump. After a dip in sales and development, plus a drop in home prices, the market is revving up again and ready for action. Keep your wallets close and your eyes on the prize, folks- the economic tide is turning!

Home-selling activities always boom this time of year, with sales activity increasing by a whopping 34% between February and March, and home prices rising by 3% during the same period, according to the National Association of Realtors. But new data for March suggests a reversal of fortune after a slight turnaround in February. On top of that, economists predict a mild recession in 2023, especially after recent bank closures.

From High to Low: Understanding the Current State of Housing Activity

Mortgage rates have finally descended from their peak, now resting at an average of 6.43% according to recent Federal Reserve reports. However, homes are still out of reach for many due to affordability pressures. Fortunately, the Case-Shiller U.S. National Home Price Index has crumbled almost 5% since its summit last June. In select markets, prices have plummeted even further. These dip and dive trends in price are making home ownership more accessible for a greater range of potential buyers. This, in turn, drives up demand while making housing scarce – at least, for the time being.

Love was in the air for home sales in February, but in March it was a different story. While the Northeast held steady, the rest of the country saw a 2.4% dip in selling activity for existing homes. Mortgage applications suffered a similar fate, with a 1.2% dip after a promising rise the week before. And let's not forget about new housing starts, completions, and authorizations - they took a slight hit in March after a brief surge in February. Will the real estate market bounce back this spring? Only time will tell.

Dr. Aleksandar Tomic, Director of Boston College's M.S. in Applied Analytics and M.S. in Applied Economics programs, has news to share. According to Tomic, the recent increase in home sales is just a temporary blip caused by the seasons changing. The reality is that most markets are still struggling with high house prices and limited affordability. And with interest rates still hoisted high, Tomic doesn't see any meaningful relief in sight. So, brace yourselves, buyers, the hunt for affordable housing still continues!

Hold onto your mortgages, folks, it looks like the regional banks are tightening their lending standards. Since these banks dominate the US market, it's safe to say that we're all going to feel the pinch. Desmond Lachman, a former deputy director at the International Monetary Fund, predicts this credit crunch will knock demand for homes and put our economy at greater risk of a recession. Brace yourselves, as home prices could tank up to 20% from their peak. The worst part? The full impact of this unpleasant turn of events might not be felt for a while, leaving us all in a state of uncertainty.

Risky Business: How a Feud with China Could Trigger a Recession

The Federal Reserve has been walking a delicate tightrope, trying to combat inflation without damaging the economy. This balancing act can go smoothly, but as history has shown, it also relies on good fortune. Any external shocks to the system could push us towards a recession. Economic expert Tomic warns that a dispute with China over Taiwan could result in significant trade disruptions or even a massive financial shock – and that would spell big trouble for the US economy. According to Tomic, if inflation or inflation expectations go up, the Fed will push the federal funds rate higher. That means borrowing money is going to get even more expensive for us regular people and businesses. Be prepared to tighten those purse strings! Are we heading for stormy weather in the financial world? Only time will tell.

Did The Fed Nailed It Before?

The jury's still out on what a "soft landing" looks like when reviewing past attempts by the government to tighten monetary policy. However, most economists agree that the rate hikes from 1993 to 1995 were a success in avoiding a bumpy landing. Back then, the Fed acted preemptively by raising the federal funds rate, even though inflation was only at 2.8% and employment was stable. The Fed made the right call - inflation could have shot up higher, but they intervened in time to avoid any potential turbulence.

In economics, it's rare to have a perfect landing, but the Fed nailed it here. Unemployment decreased for six consecutive years, inflation stayed stable for two years before a slight dip, and GDP growth remained impressive throughout the decade. The Fed was hailed for averting a recession, but it wasn't just luck, they acted proactively with foresight. The cherry on top? They did it all with style and grace.

Is the Fed in a tough spot with all the global crises and pandemic-driven inflation? Some may say yes, but let's dig deeper. While the decision to start tightening monetary policy may have been delayed, it was justified by evidence of transitory inflation. However, the war in Ukraine, supply chain issues, and climate change are all variables that cloud the Fed's ability to achieve its goals. So what's the verdict? As Tomic puts it, only time will tell if a soft landing is possible, but so far the Fed has made some strides in slowing inflation with minor adjustments.

Eyeing a Home Purchase? Here’s What You Need to Know

Investing in a new home always appeals until buyers start wondering if the timing is right. According to top experts in the industry like Tomic, the answer is "not just yet". With remote work arrangements, people are staying put, inflating inventory costs. But as offices reopen, and job changes occur, we should see more property options coming into play. Meaning? Don't put your eggs in one basket just yet- there's no sign of significant price surges.

While uncertainties abound, the writing seems to be on the wall for a possible recession and its impact on the housing market. As bank closures cause havoc on mortgage lending, March's dwindling sales and building activities signal a fall in property values. Alas, it's prudent to prepare for the worst and anticipate prices to plummet in the coming months. Don't bet the farm on national home prices taking a miraculous upturn any time soon.

Are you considering waiting out the housing market downturn? Well, logic suggests it may be advantageous, but hold on tight. Market-dependent price trajectories have investors needing to make choices based on data in individual markets. Zillow forecasts rising prices in 294 markets while falling prices in 102. Pay attention, economists predict some markets in the Southeast have hit a price bottom. So now is the time for savvy investors in Knoxville or Savannah to buy up. But hold up, investors in San Francisco, Denver, and Las Vegas should expect a change in prices. Are you prepared for what's next in the housing market?

Nobody wants a recession, but let's face it - we can't cling to false hope. The housing market headlines in February may have been promising, but the March data looks less rosy. There's trouble brewing, folks. So, if you're an investor, you need to do your due diligence and look at local data before making any big decisions. And hey, even if things do turn around, don't forget to crunch the numbers before diving in. Especially if you're borrowing money. Uncertainty is the name of the game in the housing market, but by taking a closer look at the facts, you can protect yourself from financial disaster.