Is a Housing Bottom Already In?

The severe contraction in the US housing market over the past year looks like it may be coming to an end, and the bottoming-out is raising hopes that the country could avoid a recession altogether.

That’s because historically, housing has been a critical driver of the broader business cycle. Low interest rates can boost demand for homes, which drives up prices, building activity and construction jobs. Higher prices also help support consumer spending through the so-called “wealth effect,” and when the Federal Reserve raises rates, it all tends to go in reverse.

Now, with the Fed poised to wrap up its tightening campaign — perhaps next week — mortgage rates have probably peaked. Meanwhile, the job market has remained resilient and all of that has helped key housing indicators rebound in the early months of 2023.

Ellen Zentner, the chief US economist at Morgan Stanley who has stuck to her call for a “soft landing” even as many others have thrown in the towel, says it may save the economy.

“It seems pretty clear when you look at the activity data, both home building and home buying, that we’re rounding the bottom now,” Zentner said. “If you’re thinking about it in the traditional way, that the business cycle is pretty much the housing cycle, then that’s another piece of evidence that you can actually have a soft landing.” Most economists expect the US to fall into a recession sometime in the next year, as the Fed’s aggressive interest-rate increases to tame inflation dent growth and raise unemployment. How severe, or how “hard” a landing that will be, is debatable. The key is the labor market, which has shown remarkable resilience despite a year’s worth of rate hikes. So long as people are employed and making a good income, they’ll remain able to buy and sell homes — especially if mortgage rates don’t go up any further. Right now, things are looking up: New-home sales jumped in March to the highest level in a year, according to government data out last Tuesday and home construction projects have risen about 6% over the last two months after falling 26% in the preceding nine months.

Buyers have largely been gravitating toward new construction since there’s limited inventory on the resale market, as many existing homeowners with low mortgage rates aren’t listing their properties. That’s kept sales of previously owned homes depressed, but they’re also starting to turn the corner — those sales in March were 11% above January’s low.

Lower mortgage rates and home prices could bring in more buyers. The S&P CoreLogic Case-Shiller index of prices in 20 US cities in February was nearly 5% below last year’s peak, according to data published Tuesday but they jumped more than 40% from June 2020 to June 2022. “Recent drops in house prices and mortgage rates have led to an increase in mortgage purchase applications and more pending home sales, showing even a small boost in affordability will bring buyers back,” Oren Klachkin and Ryan Sweet of Oxford Economics said in an April 21 report.

With the housing market poised to return to growth, it could help limit the pain in the rest of the economy when the full impact of the Fed’s rate hikes — and tighter credit conditions after multiple bank failures — materializes.