In today’s Macro Chartmania column, we focus on the real estate market in the United States. We believe that the housing market IS the economic cycle in the United States or at the very least, that it plays a major role in the current cycle. The latest figures confirm that the real estate market will seriously slow down in the coming months. It is too early to know if the landing will be soft or if it will be brutal. Of course, the more brutal it is, the higher the probability of a recession or “recessionette” in 2023. For the moment, the prospect of a recession is not our central scenario.
In September 2007, American economist Edward E. Learner wrote an interesting article on the eve of the global financial crisis: Real estate IS the economic cycle. We do not share all of his conclusions, but the main thesis holds up quite well. Over the past several decades, the housing market has consistently played a vital role in the US business cycle. This is also the case in the current cycle.
Economists and investors have paid insufficient attention to the housing market over the past two years, particularly at the start of the pandemic, when sweeping economic support measures fueled demand and contributed to form speculative bubbles all over the United States (nationally, housing prices have increased by almost 40% on average since the pandemic).
The real estate market is now vulnerable
In a context marked by galloping and generalized inflation which is eroding household confidence and by real estate rates which now exceed 6% following the tightening of monetary policy by the Fed, the probability of a hard landing in the real estate is now higher. In recent weeks, several large real estate companies like Redfin Corporation or real estate developers like Lennar (the second largest real estate developer in the United States) have warned of the risk of a slowdown. Some have even already lowered their prices and are granting benefits in certain areas to support demand. But it is too early to know if this will bear fruit.
For the moment, all the statistics confirm a strong slowdown. The market is very unbalanced. In May, sales of homes already built fell 3.4% to 5.4 million units. This is a new post-pandemic low point. Sales of already built homes have fallen 17% since January. The largest and most worrisome declines were recorded in the Midwest, West and South of the country. At the same time, the median price continues to increase (+15% to 408,000 dollars, a new record). The stock is very low, with only 2.6 million goods available. Building permits and housing starts also fell in May. Housing starts fell 14.4%. This is the third consecutive monthly decline. Building permits fell 7% in May as well.
The market is in a unique situation. The last time the number of available homes was so low was in 2007 (see graph below). The situation is expected to worsen in the short to medium term. The sharp rise in real estate rates, which has only just begun, is a major constraint for new buyers. If we add to this the locking of rates at very low levels (this means that interest rates will not move between the offer and the signature), it is a safe bet that mobility will be less on the real estate market. This will have repercussions on the economy as a whole, starting with housing construction, with different delays depending on the accumulated delay.
The next real estate market figures will help us know if there is a high risk of recession or not
The latest survey by professional forecasters puts the probability of a recession at 20%. When this level is reached, it means that the economy is usually already in recession. Economists are pretty bad at accurately predicting recessions. There are two exceptions, however: in the early 1980s, when Fed Chairman Paul Volcker sharply hiked rates to counter inflation (but it was so obvious even economists saw it coming) and in 1995 when this resulted in a soft landing for the economy.
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For the time being, we are ruling out the scenario of a recession in the United States. The likelihood of that happening this year or next will largely depend on how the housing market develops. On the other hand, there is no doubt that growth will slow much more abruptly than many observers expect, especially in 2023, whether there is a technical recession or not. All the statistics point to a sharp slowdown in growth.
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