MNI INTERVIEW: Most Of Housing Effectively In Recession-Fannie

Most of the U.S. housing market is effectively in recession as existing home sales languish at their lowest levels since the global financial crisis and the recent spike in long-term Treasury yields puts additional pressure on new home sales, Fannie Mae chief economist Doug Duncan told MNI.

New construction has been one portion of the market where activity remains brisk, but demand has fallen after 10-year Treasury yields surged to 16-year highs.

“It has definitely slowed the sales pace on the new home side. The existing home side was so low that I don’t see it getting much lower,” said Duncan in an interview. “That is totally not normal. That part of the market is clearly in recession.”

U.S. mortgage costs have nearly tripled to around 8% since the Federal Reserve signaled it would be raising interest rates aggressively to combat inflation. That means millions of homeowners who locked in ultralow mortgage rates are unlikely to move any time soon, he said.

Existing home sales account for about 85% of the total U.S. housing market and are now at their weakest levels since 2010, when the economy was still smarting from the aftermath of the housing crisis that led to a global financial crash in 2008.

“I wouldn’t call us back to normal in any way, because it’s not normal that you see 3% mortgage rates for a couple of years creating an unusual lifetime opportunity which has distorted some behaviors that were already under way,” said Duncan.

Not only are baby boomers retiring in the homes they already owned, many Gen-Xers also bought homes when they were making crucial decisions – like where to send their kids to school – that makes them unlikely to move.

“That locked in a whole bunch of additional existing homes, keeping them off the supply side of the market. You’ve got therefore a supply issue much more than is normal on the back of the builders,” he said. “You can see that in the new home sales numbers – the share of first time buyers much higher than normal.”

FED OUTLOOK

Duncan said he thinks the Fed is done raising interest rates but there’s still a chance that high inflation might force it to deliver additional increases.

In addition, he thinks the Fed will keep rates higher for a lot longer than markets are anticipating.

“The Fed is done raising rates but their bias is upward in the event that inflation doesn’t cool to their satisfaction. And we don’t have them cutting rates until the second half of 2024,” he said. “When they ease, they may ease at a slower pace than markets anticipate as well.”

Duncan sees the economy experiencing a mild recession in the first half of 2024, and expects housing activity to start picking up gradually again in the latter half of the year.

He thinks mortgage rates will hover around 4.5%-6% during the next housing cycle, potentially a bit higher.

“Is the rise in rates recently partly an expectation of sustained stronger growth, in which case those rates might run a little higher? Or is it a function of the outsized level of government debt that has to be absorbed, which also could put an upward bias?”