Navigating Recession Concerns – Real Estate Market Update
Kevin Graham6 minute-read
August 10, 2022
If you’ve been following the economic news at all, you’ve probably seen plenty of speculation about a potential recession. We’ll go over a little bit of what that means for the housing market and how to address the concerns of your clients in our top story.
The Big Story
Based on gross domestic product (GDP), the economy shrank for the second quarter in a row. Traditionally, this has been seen as a harbinger of a recession. However, that worked better when we had an economy based on the export of goods. For several decades now, we’ve had a services-exporting economy.
Since 1978, the United States has technically relied on the Business Cycle Dating Committee at the National Bureau of Economic Research (NBER) to call recessions and expansions based on the fact that they look at a wide range of data. While the committee does look at GDP, it also considers things like employment industrial production and consumer spending.
There’s also the issue that whether we’re in a recession or not doesn’t really matter and shouldn’t matter to your clients. I know that’s not what you were expecting to read. Let me explain.
A recession can certainly cause economic pain and there’s no doubt we don’t want one. At the same time, no matter when a recession happens, you won’t know until you’re already in it. The reason for this is that no matter what data you use to determine the direction of the economy, it’s always something that already happened. Therefore, it’s kind of pointless to try to predict.
What really matters at any given time is how your clients feel. And for many in this economy, there are still positives that would point to not being in a recession. The economy added 528,000 jobs last month and the unemployment rate stands at a staggeringly low 3.5%. Additionally, a couple separate measures of consumer spending show that continues to increase.
So the question is not whether we’re in a recession. It’s whether your clients have the resources and ability to accomplish their short- and long-term home and financial goals.
More News You Can Use
Consumer Price Index (CPI)
One worrying thing for the economy is that prices were up 1.3% in June and have risen 9.1% since this time a year ago. When food and energy were removed, the monthly increase was 0.7% and 5.9% since last year.
Looking at the numbers we care about in housing, the amount it would cost for an owner to rent an equivalent amount of space was up 0.7% in June. Meanwhile, the cost of rent overall was up 0.8%, which is the biggest increase since April 1986. Renters are certainly feeling the impacts of inflation.
Retail sales were up 1% overall, matching the number without vehicles. Taking out both automobiles and gas, sales rose 0.7% in June.
In the numbers that matter the most on the real estate side, sales and building materials and garden equipment were down 0.9% in June. On the plus side, sales of furniture and home furnishings rose 1.4%.
Housing Market Index
In July, homebuilder confidence fell to 55. This drop in overall points is the biggest 1-month drop ever seen. Single-family home sales were down 12 points at 64. Meanwhile, expected sales over the next 6 months were down 11 points at 50. Finally, traffic of buyers going through homes was down 11 points at 37.
This isn’t a good thing in the short term for residential construction. Builders are seeing the effects of higher mortgage rates and pulling back a bit.
New Residential Construction
Housing completions were down 4.6% at 1.431 million, still 4.6% above last June. On the single-family side, completions were down 4.1% at 996,000, while there were 366,000 multifamily completions.
Meanwhile, housing starts came in down 2% at a seasonally adjusted annual rate of 1.559 million. This was down 6.3% from last year. Single-family starts came in down 8.1% at 982,000. In buildings with five or more units, the rate was 568,000.
Permits pulled represent the longest time frame from actual housing inventory completions, but these were down 0.6% at 1.665 million. This is still 1.4% higher than last year. Meanwhile, single-family permits were down 8% at 967,000 to go along with 666,000 multifamily permits.
The down numbers make sense in light of decreased building confidence.
Existing Home Sales
Existing home sales were down 5.4% and have fallen 14.2% for the year as sales slipped to 5.12 million on an annual basis. There are very few homes available, high mortgage rates and higher prices.
Sales of single-family homes were down 4.8% at 4.57 million units, while multifamily homes saw sales slip 9.8% at 550,000. Those numbers are down 12.8% and 24.7% respectively on the year.
Still, supply remains tight. At the current pace of sales, the stock of homes on the market today would only last for 3 months. Additionally, homes are only on the market for an average of 14 days, a new record pace. This has meant higher prices, up 1.9% in June to 416,000, a figure up 13.4% since last year.
Case-Shiller Home Price Index
Home prices were up 1.3% on a seasonally adjusted basis across the 20-city index in May. It’s important to note that this number is a rolling 3-month average. Prices were up 1.5% overall and have risen 20.5% since the same time a year ago. While prices are still going up, the pace of manual price increases has started to slow.
FHFA House Price Index
Unlike the Case-Shiller index, this is a month-to month metric that only looks at the prices of homes backed by conventional loans. At the same time, it is nationwide.
Directionally, the two indexes are headed the same way. Prices were up 1.4% in May and they’ve pushed up 18.3% for the year.
Overall consumer confidence fell 2.7 points to 95.7. On the home buying side, it’s referenced that there’s a deep low among the consumers surveyed in that just 4.4% want to buy in the next 6 months.
You can look at that negatively, but if we generalize that across the economy, if 4.4% of Americans were to buy a house in the next 6 months, that’s a lot of volume you can go get.
New Home Sales
Overall new home sales were down 8.1% at 590,000 on an annual basis. The good news is that supply isn’t as much of a concern here with new home supply sitting at 9.3 months.
The median sale price of a new residential home was $402,400, which points to more supply at the bottom end of the market. It’s also important to note that this is one of the few times that the median existing home is going to be more expensive than your median new home.
This still isn’t likely to make a ton of difference because the average American thinks that new is more expensive, and usually, they’re right.
Pending Home Sales Index
The number of existing homes under contract for sale fell by 8.6% in June to an index level of 91. This won’t mean good things for July existing home sales numbers because this is a leading indicator.
As briefly mentioned above, overall GDP declined for the second consecutive quarter, down 0.9% after the economy shrank 1.6% in the first quarter. The good news is that consumer spending continues to grow, up 1%.
The downside for those of us in real estate is that a large part of that GDP increase was a 14% drop in residential investment. In this way, rising interest rates appear to have had an effect.
The Federal Reserve raised the short-term federal funds rate by 0.75% in July. Between this and the wind down of the Fed’s purchases of mortgage-backed securities, rates have been trending up over the past several months.
At the same time, although this is the broader trend, rates tend to be up and down to go along with market appetites. Given this, when you see rates drop, it’s important to let your clients know they should lock their rate at the earliest opportunity.
Traditionally, you can’t lock your rate prior to signing a purchase agreement. However, with our RateShield® program, you can now lock your rate for up to 90 days while shopping for a home.
As an additional tool to help clients in a rising rate environment, if they lock between now and September 30, if rates drop in the next 3 years, they can refinance with reduced closing costs. It’s a key advantage of working with Rocket. You can find more details on .
According to Freddie Mac, the average rate on a 30-year fixed mortgage with 0.8 points paid in fees was down 31 basis points to 4.99%, up from 2.77% 1 year ago.
Looking at shorter terms, the average rate on a 15-year fixed mortgage with 0.6 points paid was down 32 basis points at 4.26%, which is up from 2.1% last year.
Finally, the average rate on a 5-year treasury-indexed, hybrid adjustable-rate mortgage with 0.3 points paid was down 4 basis points at 4.25%, which has risen from 2.4% last year.
Now that you have the knowledge, go forth and spread it to your clients. Have a great month!
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