Earlier in 2022, an economic recession seemed inevitable by year’s end. Two consecutive quarters of negative gross domestic product (GDP) — typically the main indicator of a U.S. recession — along with the bear market experienced in the stock market, made a recession declaration all but official.
However, with news of positive GDP growth in the third quarter (Q3) of 2022, along with the ongoing jobs recovery, worries of an economic recession have somewhat eased. This small bounce in GDP was attributed to higher consumer spending — hello, inflation — which was sufficient to counteract a 7.4% decline in the housing sector, according to the Bureau of Economic Analysis.
But to fuel this amount of consumer spending, households are saving less. The national personal savings rate is at a decade’s low, at just 3.5% as of August 2022. Today’s savings rate has plummeted by necessity, as households struggle to make ends meet under pressure of the highest consumer price inflation since the 1980s.
As a senior economist for Wells Fargo recently put it in the New York Times, as long as spending continues to outpace incomes, consumers are on “borrowed time.”
While an economic recession has not yet arrived in 2022, it’s only a matter of time; for housing, the recession is already here.
The housing recession will worsen before it gets better
Like water in the cracks of a foundation, the recession has gradually seeped into the housing market, causing damage like:
- decreased home sales volume;
- losses in residential construction;
- higher inventory; and
- deep cuts to home values.
California home prices have fully reversed course from their May 2022 peak, ranging from 4% below the peak in San Diego’s low tier to a staggering loss of 10% in San Francisco’s high tier as of August 2022. This rapid decline took place over just three months — and prices are still plunging.
Many media outlets have attributed the home price dive to the Federal Reserve (the Fed), and their work to cool inflation by raising their benchmark interest rate.
While 2022’s rising interest rates certainly play a role, as they cut buyer purchasing power instantly, the home price correction taking place in 2022 was in the cards regardless of the recent interest rate leaps.
Years of home price increases vastly exceeding the pace of incomes has built an unsustainable market, with investor purchasers increasingly taking the place of traditional owner-occupant homebuyers. In other words, to borrow some language about the broader economy, the housing market has long been operating on borrowed time.
Therefore, anyone who thinks this is a short-term setback for home values, likely to rebound the moment interest rates let up, is dreaming.
Homebuyers — and real estate agents — have gotten used to experiencing housing as a get-rich-quick scheme. It’s time for everyone to pivot and see housing as shelter or long-term investment first.
Prudent homebuyers will wait for prices to bottom before returning to the market, expected to occur here in California around 2025. Short-minded flippers will sink deeply underwater in the coming years as prices continue to fall.
Real estate professionals who wish to maintain a living even as traditional market participants take a step back from housing will learn to innovate, taking on alternative streams of income. Poised to profit off existing contacts in real estate-adjacent careers, these agents and brokers will survive and succeed even as the housing market continues to stumble in the years to come.
Source: journal.firsttuesday.us | by Carrie B. Reyes