What is a Housing Recession?
Metaverse, EV, charging station, WFH, hard pass, cancel culture, throuple, second gentleman, quiet quitting… These are just some of the hundreds of words and phrases that have entered the popular lexicon in the past few years- words that didn’t enjoy widespread currency until just recently. The latest neologism that seems to be gaining traction? Housing recession.
I had to look up the phrase because, although I understand its intended meaning, I don’t ever recall stumbling upon it during my thirty-two year tenure in the business. It turns out that a lot of newspapers, journals, podcasts, and blogs have started using the term for the first time this summer. So, what exactly is a housing recession? As best I can discern, it’s a downturn that’s characterized by multiple metrics — fewer home sales, lower housing starts, and declining mortgage lending. It’s a downturn, but more pronounced and, despite its imprecision or tether to hard data, it seems to efficiently characterize the current state of the market.
The Current State of the US Economy
An actual recession is more academically and precisely defined. It occurs when the United States economy experiences two consecutive quarters of reduced gross domestic product output. GDP fell during the first six months of this year meaning that the US is probably experiencing a recession. However, there is a strong correlation that exists between job creation and the textbook definition of a downturn and recent employment numbers are confounding. Given the speed with which the US is creating jobs, economists are debating whether the standard definition of a recession needs to be revised in a post-COVID world.
The one thing that everyone seems to agree on is that inflation is out of control and needs to be tempered. The most effective strategy that the Federal government can employ to cool the economy is raising the benchmark interest rate. If the economy is currently recessive, the Federal Reserve needs to be careful not to raise rates too aggressively and overcorrect, causing even greater contraction of the GDP. If we’re not currently experiencing a recession, then the question is whether Jerome Powell can navigate a “soft landing”. In other words, can he cool inflation while, at the same time, prevent the country from falling into a recession. Whatever the scenario, there is some recent indication that the Fed’s efforts may be starting to succeed. The rate of inflation has dropped from 9.1% to 8.5% while job creation seems to be slowing. There were 315,000 new jobs in August- down from 526,000 reported in July. The Federal Open Markets Committee meets again on September 20th and it is widely assumed that they will increase rates another half of a percentage point. Ultimately, only time will tell whether the FOMC is navigating these dangerous shoals effectively.
Real Estate – It’s What I’m Supposed to Be Writing About, Right?
Because this is a real estate newsletter, I should probably circle back to my core competency and the topic at hand: housing. Real estate and its ancillary sectors account for approximately 17% of the US GDP. The Federal Reserve has been raising interest rates knowing full well that, in doing so, they’re slowing an enormous segment of the economy. Thirty-year mortgage rates are now at 6.0%- double what they were six months ago. As a result, hundreds of thousands of buyers have put their search for a new home on hold and the deceleration in activity, as demonstrated by any number of statistics, points to the fact that the Fed is accomplishing what it is that they set out to do…
- Inventory rose in July at a record annual pace- up 30.7%- as a result of fewer buyers writing offers
- Pending home sales dropped in July- the eighth month in the past nine in which sales have declined.
- August was the first month in nearly 19 months in which the average US home sold below its asking price.
- Mortgage applications recently hit a 22-year low.
- Housing affordability hit a 33-year low as determined by income, mortgage rates and sale prices of existing homes.
- 15% of all real estate deals fell apart in the month of June- the highest since the pandemic started (unless you live in Rochester which, at five percent, has the nation’s second lowest rate of canceled contracts).
Rochester
Let’s bring all of this home (no pun intended) and discuss what’s going on in Rochester. Our city recently took the number five spot on a list of national real estate markets that have cooled the slowest. Why? I’m speculating that, until May 2020, local real estate increased in value as it always has- at a snail’s pace. Four or five percent growth was the norm for a very long time. An increase of 31% in the past two years wasn’t so much a windfall as it was a leveling of the market as we compare ourselves to other communities throughout the country.
Concomitantly, we still have a greater number of buyers than sellers. Today’s market is primarily populated by buyers who have an absolute need to purchase and they’re intent on doing so. Although small in number, these would-be-homeowners still outnumber the available units for sale (there are currently only 513 homes actively being marketed for sale in Monroe County). The competition for property that is in great condition, in a desirable school district and priced appropriately is so fierce that we’re still negotiating sales with multiple offers- above asking price. Although it’s no longer the norm, it’s still happening.
In short, this is all good news for local homeowners. Taken together, the fact that we are now at par market value with other communities coupled with the fact that there are more buyers than there are sellers means that we’re probably not going to see a significant downward correction in local real estate valuation. We have a long road to meander before we understand what is going on with the economy. The road to recovery is probably even longer. That being said, I’m glad to report that, at least in Rochester, you probably don’t have to add the loss of equity to your already long list of concerns!
As always, thanks for your support and your kindness. In particular, I love being approached at Wegmans or at a restaurant by strangers who want to talk to me about the most recent newsletter or video. If you’re so compelled, introduce yourself next time we’re in the same room. I’d love to chat! Until then, enjoy the arrival of the region’s most beautiful season!