Did we avoid a recession with the help of the housing market?

Economists regard the residential housing market as a primary indicator whether a recession is looming, and construction data and home transactions began to show positive signs that the fall of housing can have Hit bottom in February. Many believe we’ve dodged a severe recession, and some are even optimistic that the Fed will achieve the soft landing the central bank was hoping for: a stabilized inflation outcome without a significant rise in unemployment.

Consumer spending has began to stabilizeand the Fed has signaled that it will probably put Future rate hikes on hold while keeping an eye on inflation. The rate hikes that began last March may finally be coming to an end. Meanwhile, signs have pointed to a recovery in the housing cycle. After a contraction in sales activity, a slowdown in residential development and falling house pricesThings started to change in February.

But we may not be out of the woods. Home sales activity always picks up at this time of year. There is typically a 34% increase in sales activity between February and March, and home prices rise 3% over the same period, according to the National Association of Realtors. The new data for March actually shows the opposite after a slight change in February. Furthermore, many economists continue to forecast a mild recession in 2023, especially in light of the recent bank closures. There is a chance that home prices will fall further from their most recent low before the economy really picks up.

The ups and downs of real estate

Mortgage rates have fallen from their peak, with recent data from the Federal Reserve putting the average 30-year fixed mortgage rate at 6.43%. That’s still high enough to cause affordability pressure, but the Case-Shiller US National Home Price Index it has fallen about 5% from its peak last June, and in some markets, prices have fallen further. Together, these factors have put home buying within the reach of a larger group of buyers, causing demand to increase while housing supply remains tight, at least temporarily.

In February, existing home sales increased 13.8% for the first time since July 2020. But in March, existing home sales activity fell 2.4%. He northeast was an exception, maintaining a constant sales activity. The latest mortgage application data from the Mortgage Bankers Association also shows a 1.2% drop in mortgage applications after a rise the week before. Likewise, new housing started, completed and authorized fell slightly in march after a rebound in February.

Dr. Aleksandar Tomic, director of Boston College’s MS in Applied Analytics and MS in Applied Economics programs, says the temporary uptick in sales activity was likely a seasonal issue. “Housing prices remain very high, creating affordability issues in many, if not most, markets,” he says. “Also, interest rates are still high and I don’t think they will drop significantly anytime soon, putting additional pressure on prices.”

Regional banks have also been backing out in issuing new mortgages and tightening their lending standards recently, which is expected to have a significant effect on demand, as regional banks account for the majority of US mortgages. According to Desmond Lachman, former deputy director of the International Monetary Fund, this credit crunch will curb housing demand and put the economy at greater risk of recession, dealing multiple blows to the housing market. He expects home prices to fall as much as 20% from their peak, but notes it could take a while to see the full impact.

The confidence of home builders is getting better, but slowly. Even with continued problems with the supply of building materials in the construction industry, builders are increasingly optimistic, but the National Association of Home Builders/Wells Fargo Housing Market Index has only risen to 45. That’s the highest level since September, but the reading still indicates poor housing market conditions.

Factors that could result in a recession

So far, the Fed has managed to reduce inflation without significantly weakening the economy, according to Tomic. But with history as a guide, the Fed is only likely to achieve a soft landing if there are no external shocks to the economy; in other words, it takes a bit of luck. Tomic says tensions with China over Taiwan could “result in significant disruption to trade or a significant impact on the financial system,” which could push the economy into recession. Tomic also says that rising inflation or inflation expectations would prompt the Federal Reserve to raise the federal funds rate further, making credit even more expensive for consumers and businesses.

Has the Fed been successful in the past?

Economists disagree on what constitutes a soft landing when looking at past tightening cycles, but most identify the outcome of the 1993-1995 rate hikes as a Soft landing. When the Federal Reserve began raising the Fed Funds rate in 1993, it did so as a precautionary measure: The Consumer Price Index was only 2.8% with a stable unemployment rate, but the Federal Reserve anticipated higher inflation. and adjusted the federal funds rate accordingly.

The Fed achieved a perfect soft landing in this case. The unemployment rate declined for the next six years, and the inflation rate held steady for two years before declining slightly. GDP growth remained above 3% for most of the decade, and the Fed was applauded for avoiding a recession. But the Fed had luck on its side and the foresight to intervene proactively.

Some people may think that the Federal Reserve waited too long to start tightening monetary policy this time, but there was evidence that inflation may have been transitory at the time, driven by the pandemic. Meanwhile, multiple global crises are putting pressure on the US economy, for example, the war in Ukraine, supply chain issues, and climate change are complicating the Federal Reserve’s ability to achieve its goals.

“The probability of a soft landing hasn’t been decided yet,” says Tomic. “The story is not encouraging on this front, but the Fed has managed to reduce inflation so far with relatively little effect on the economy.”

How investors can respond

Home prices may not have bottomed out yet, and Tomic says he doesn’t see prices rising significantly any time soon, either. “The economy is still strong and inventory is still low because people don’t need to relocate for work as much as they used to because of remote fixes,” he says. “However, as returns to the office increase and turnover in the labor market also increases, more inventory is likely to become available. For all these reasons, I really don’t see house prices going up significantly.”

Tomic doesn’t know for sure that this is true, nor does anyone else. But since most economists Still forecasting a recession sometime this year, bank closures are hitting home lending, and March sales and construction activity trending down again, it’s reasonable to believe that prices will continue to fall in many markets. National house prices are less likely to start rising rapidly again in the near future.

Following that logic, it would seem that waiting out the rest of the housing market downturn would be to investors’ advantage, but price trajectories are so market-dependent that investors will have to make decisions based on data from individual markets. For example, Zillow forecasts rising prices in 294 markets and falling prices in 102 markets. Some markets in the Southeast may have already bottomed out, economists say, so investors in Knoxville or Savannah may find now is an opportune time to buy. Meanwhile, cities like San Francisco, Denver and Las Vegas are expected to see further price declines.

The bottom line

Everyone is anxious to avoid a serious recession, and that may result in some overly optimistic attitudes at the first signs of a turnaround in the housing market in February. But the March data paints a different picture, and most economists believe more trouble lies ahead. Investors should consult local data when making investment decisions. And no matter where the market goes, it’s still important to look at the numbers to make sure you’re getting a good return, especially if you’re dependent on funding. Due diligence goes a long way in mitigating the effects of uncertainty in the housing market.

BiggerPockets Note: These are opinions written by the author and do not necessarily represent the views of BiggerPockets.