MNI INTERVIEW: Housing Could Lead U.S. Into Recession - NAHB

The U.S. housing market appears set to fall into a downturn and could lead the broader economy into a recession, but so far doesn't show signs of triggering wider financial instability, National Association of Home Builders chief economist Robert Dietz told MNI.

"A housing recession is clearly underway, which could be a leading indicator of a broader economic downturn," he said. "A few more months' data and we can probably judge whether or not we're in a broader recession but it could come in late 2022, early 2023."

Still, the housing market's fundamental drivers in the long run, from a housing deficit and demographics, all suggest the sector has sturdy medium term growth prospects once this period of turbulence ebbs and inflation comes back under control, he said.

"Thinking about late 2023, maybe at that point the Fed could lift off the brake a bit, bring the fed funds rate down, and we'd see a little bit of a shift down in mortgage interest rates," Dietz said, citing the central bank's 75bp of "insurance" cuts in 2019 as an example.

"We have built into our forecasts the expectation that we will likely see some limited lifting of the brake by the Fed by time we get to 2024," he said. "We are not dependent on it but more expectant."

FLATTENING PRICES

Existing-home sales have dropped five straight months on rising interest rates and recession fears have held off would-be buyers, as U.S. home construction is slowing fast and existing home inventory builds. Mortgage demand is also down hitting a 22-year low. But Dietz still sees positive prices.

"Within new home prices we've seen about a 37% gain since January 2020. That is unsustainable," he said. "We're looking for about 3% price growth on net in 2023."

"Really what we are talking about are price declines late this year, and especially in some local markets such as Boise, Idaho," he said, citing the city as the least affordable market. "I'm definitely more bearish on home price growth. It's going to slow down here in the second half of the year."

Production bottlenecks, rising home building costs and high inflation are causing many builders to halt construction because the cost of land, construction and financing exceeds the market value of the home, Dietz said. "Thirteen percent of builders in the July HMI survey reported reducing home prices in the past month in order to help demand. I expect that share to grow in the months ahead."

But Dietz noted lagging effects from home prices as they feed into official CPI and PCE inflation prints, still-high construction costs and said some products are still in short supply, from garage doors to windows.

"The cost of building a home is still going up and the industry is still down 400,000 skilled construction workers," he said. "Residential construction material costs in aggregate, that go into apartments, home building and remodeling, were increasing three months ago at a 22% year-over-year rate and that has slowed to only 12% as of June."

The Bureau of Labor Statistics released data last week showing the consumer price index was 9.1% over the year to June, but housing economists have said lagging housing costs will continue to drive inflation as the Fed hikes rates. (See: MNI INTERVIEW: CoreLogic Sees US Shelter CPI At 7% By Yearend)

MORTGAGE RATES

The impact of higher interest rates going from a 3% rate environment to above a 5% rate environment has had a clear effect on consumers trying to get a mortgage, he said. The spread between mortgage rates and the 10-year Treasury is also wider than it has been for years, primarily due to the Fed's QT program, he added.

"From a forecasting perspective, some of that spread will close. But it's going to remain somewhat above where we saw it, certainly a year ago," he said.