Is the Housing Market in a Recession or Correction?

Is the Housing Market in a Recession or Correction?

At this stage, everybody agrees: The housing market is cooler than it was one or two years ago.

Lacking consensus is the best word to describe this market slowdown. Slump? Downturn? Slowdown? Implosion?

The two words you’re most likely to hear applied to the present housing market are recession and correction.

Recession is a technical economic term for when home sales decline for six consecutive months, a benchmark reached in July 2022. Correction is a less scientific term used by investors and other housing experts to describe a market that is reverting back to normal after an unprecedented and unsustainable COVID-era surge.

What are we witnessing? A market in ominous decline, or one that is shifting to a more reasonable post-pandemic normal? Learn why experts disagree, and what to tell your clients.

It’s a Housing Recession

Taken together, this year’s trends in the housing market look grim: Mortgage rates have doubled. Home sales are down, few new homes are being built, and consumer sentiment about the housing market is cratering.

And for some housing experts, those bleak indicators flash a warning of lasting recession when coupled with what’s anticipated in the coming months.

The Federal Reserve is still committed to raising interest rates and reducing a decades-high inflation. Increased interest rates typically mean higher mortgage rates, and higher mortgage rates mean an even steeper drop in buyer demand.

Plus, inflation and ongoing supply chain issues are likely to depress the number of new homes being built, which squeezes buyers out of the market and can even cause them to back out of contracts on new homes.

Finally, the term recession is being used in regards to the housing market because the term recession is being used frequently in regards to the economy at large. Avoiding a recession while jacking up interest rates is a major challenge for the Federal Reserve – and the housing market is affected directly by rising rates.

It’s a Housing Correction

Given the headlines, how could anyone believe the housing market is strong enough that recent events really represent a correction? As with more bearish observers, optimists about the housing market are thinking about the future.

For one, inflation is already tapering. The Federal Reserve may not need to raise mortgage rates too much higher to combat inflation, and even if rates do go up, mortgage rates may already be priced for higher interest rates.

Another crucial reality is that housing demand still outstrips housing supply. There are downsides to a dearth of new home building, but along with a glut of would-be millennial home buyers, the mismatch in home supply and demand may give the market a jolt as soon as mortgage rates once again decline.

Even if mortgage rates don’t decline this year, many buyers are aware of strategies such as adjustable-rate mortgages (ARMs) and buying mortgage discount points that make home ownership more attainable.

Most of all, the housing market in the last 30 months has been unprecedented. The COVID-19 pandemic wrought incredible change and a too-hot-to-be-believed soar in home prices. Unlike past housing swoons, people aren’t disproportionately defaulting on home loans or too financially crippled to buy a home in general. There is still demand, home prices are still rising, and much of the rest of the economy is getting back to normal.

It’s Semantics – Just Know That the Market Has Changed

Call it a recession, call it a recession – just know that the housing market is different than it was a year ago. Buyer demand has softened, more homes are on the market, and bidding wars aren’t a given.

But a cooler housing market doesn’t mean real estate is on its way out. People are still going to want to buy and sell homes, and you can still help them create demand for their listings. A saner real estate market may end up benefiting agents who work well with buyers, can effectively prospect for listings, and consistently get seller clients the strongest offers possible.