November 3, 2022

Recession question weighs on 2022 home sales

The Bureau of Economic Analysis recently reported that the U.S. Gross Domestic Product (GDP) suddenly surged by 2.9% in the third quarter of 2022 on the heels of two negative quarters – the generally accepted threshold for recession.

So, are we in recession or not? The question is key to the future of housing.

Most economic worries in 2022 have been tied to price inflation, and the Federal Reserve’s efforts to counterattack it.

Just after the GDP announcement, the Fed hiked its benchmark Fed Funds rate for the fifth time this year – up another 0.75%, up to a range of 3.75 to 4%. This rate sets the amount banks charge to lend to each other. Other types of loans, including mortgages, tend to follow the Fed Funds rate over time. The Fed rate is expected to peak at 4.5% to 4.75% in 2023,

Fed officials have made it clear: More hikes are coming to make borrowing less attractive until inflation is brought firmly under control.

Despite the hikes, other data continues to show a rosier economic picture. For instance, the job market has remained robust despite slowing business investment. Consumer spending has been relatively healthy.

The stock market has maintained steady growth after some early-year lows, and longer-term bonds are solid. Because the hikes have been widely expected, investors have been prepared.

Mortgage rates and home prices might be stabilizing as well, but the sharp rise since November 2021 has added nearly 60% to the average monthly house payment. Even with cooling prices, affordability is still at one of the worst levels in history.

According to the Mortgage Bankers Association (MBA), this has led to a sharp drop in sales. Purchase mortgage applications are down 40% from their 2021 peak.

Year-over-year sales are down 31%. Monthly payments on a median-priced home are already $1,000 higher than in January. And current homeowners are unwilling to give up record-low interest rates to trade up. Analysts expect sales to slow further throughout the fall and winter.

However, most experts say these market trends are indicative of a correction, not a crash. Sales declines may in fact lead to price relief to those still looking for a new home. But as the Millennial generation continues to age into prime buying years, prices are bound to stay elevated. Loan underwriting regulations enacted after the Housing Crash of 2008 ensure those who buy homes can afford them.

And while there is a housing “recession” in terms of sales, demand is still quite strong. Nearly 40% of homes still command full list price. There is still only about three months of supply in the existing home market, half of what is considered a balanced market.