As we wrap up 2022 and analyze the complete housing data, TalentWoo real estate recruiters are seeing some familiar patterns emerging. Although there are obvious differences in the economic conditions we’re seeing now compared to those of the housing bust before the Great Recession, there are enough similarities in home sales and price trends to make us wonder whether a correction is due. What do we mean?
Well, let’s start with the fact that home sales have fallen for ten consecutive months, while home prices continued to climb throughout the first half of the year. According to data from iEmergent, in June, they peaked and suddenly began to drop; quite erratic, wouldn’t you say?
This is precisely what happened in 2006 as the housing boom transitioned into the housing bust; and that financial mess eventually unfolded into the Great Recession. This time, however, the lag is only five months, and the price decline already appears to be happening faster than before.
Another indicator seems to be the relationship between home prices and household income. The Covid-19 pandemic led to many Americans moving into the suburbs. This increased homeownership. Combined with interest rate cuts and stimulus checks, there was a sales boom that drove home prices unsustainably higher than household incomes.
Remember that during the Great Recession correction cycle, home sales levels fell by 56% from peak to trough in a decline that took just over five years to play out. Meanwhile, the peak-to-trough decline for home prices was 26%, lasting nearly six years. Risky borrowers in risky mortgage loans began defaulting in significant numbers, which accelerated declines in both prices and sales in a vicious cycle.
Although the financial system is better capitalized now than after the Great Recession, the correction won’t be without some pain. In October of this year, annualized home sales levels had already declined by 31% from this year’s January peak and 35% from the peak in 2020. Sales are expected to fall further from the current level, but not as far as the low in 2010. We might not see the sales trough until sometime in 2024, and a modest recession is expected in 2023.
Home prices have been falling since midyear and are likely to fall the most in markets that have been the hottest in the latest boom – think of sunbelt states like Florida, Arizona, Texas. Nationally, experts expect a peak-to-trough decline of less than 26%, but it could be near 20%. The biggest factor influencing how the current housing correction evolves is how the Federal Reserve’s battle with inflation plays out; and who knows how that will unfold?
How far, how fast, and how long monetary policy is tightened will be one of the primary drivers affecting the timing and severity of the coming recession, which is highly unpredictable. Unfortunately, the unpredictable nature of the current situation makes it challenging to predict the exact outcome of this correction cycle.
In summary, we expect the recovery of home sales and prices in the current correction cycle to be shorter and less severe than the Great Recession correction cycle, but it will still need to go through a similar path. Homebuilders, developers and residential rental companies (both single-family and multi-family) may face some headwinds, but TalentWoo real estate recruiters are ready and available to help these companies make strategic hires in key roles to help them weather what’s coming.