The word of the summer might be “recession,” but is the housing market in one?
That idea seemed to gain steam this month as a pair of reports showed signs of changes in the housing market. An index by the National Association of Home Builders found builders’ confidence falling for the eighth straight month. Then a report by the National Association of Realtors (NAR) found home sales declining for the sixth month in a row in July, this time down 5.9% from June.
Both reports prompted experts at the respective organizations to term it a “housing recession,” but that doesn’t mean prices are going to crash. The NAR report showed the median existing home sales price down $10,000 from June, to $403,800, but still up 10.8% compared to a year earlier.
So what does a housing recession mean? “It really just means a contraction in home sales in the last six months. We have seen a slowdown in home sales and we have seen home builders contracting as well,” says Jessica Lautz, vice president of demographics and behavioral insights at NAR.
“It’s not a recession in home prices,” she says.
The term “housing recession” is “really an offbeat kind of phrase,” says Jeffrey Roach, chief economist at LPL Financial, a national broker-dealer. “It confuses it with what is a recession. A recession is about a business cycle in the economy.” That’s when the economy experiences a significant decline that is broad-based and lasts longer than a few months.
“I get where they’re going with it,” Roach says. “You could argue that the fact that things are slowing down dramatically as borrowing costs rise, that’s probably fair. But it’s not an equal magnitude.”
Supply and Demand Keep Home Prices Up
The fact that both home builders and home sellers are experiencing slowdowns at the same time points to why prices are still up quite a bit from last year. Prices are about supply and demand, and while demand has dropped considerably in recent months, supply still remains extremely tight. Much of the supply issue is because of a lack of new construction in the decade-plus since the 2008 financial crisis, Roach says.
Demand has certainly dropped since January, as continued increases in home prices along with a dramatic rise in mortgage rates – from near 3.3% at the start of the year to near 6% now – have made it harder for buyers to afford a home. But while it’s down, there are still far more people trying to buy homes than there are homes to buy, due in part to demographics. Many millennials want to buy homes, and there are a lot of them in that stage of their life.
“We are seeing more inventory come into the market, but it’s not enough to meet the buyer demand,” Lautz says.
Markets have certainly cooled down, but the average house on the market still gets multiple offers, Lautz says. “For homebuyers out there today, they are facing slightly less competition in the marketplace,” she says.
What Homebuyers Can Do
Given the high prices homes are still going for, buyers may want to be patient, Roach says. But for first-time homebuyers, the price of a house isn’t the only part of the equation. Rent is going up dramatically too. “Even though borrowing costs have risen, it still in the long run may be worth buying a home given that what’s driving inflation right now is rising rental prices,” he says. “It still may be an opportunity to get out of the pressure of rents.”
Whether or not the housing market is in a “recession” doesn’t change the guidance for buyers much, Lautz says. She suggests buyers work with experienced real estate agents and mortgage brokers or lenders who know the area and might be able to find deals. Buyers should also consider what they can compromise on, as it may be easier to get a home in a somewhat less competitive area. “Something generally has to give for homebuyers,” she says.
Look at more affordable or overlooked areas of your housing market to find houses that can fit within your price range. Buying a house often entails some compromise on the buyer’s side, experts say.