Just how hard a landing can the housing market handle right now? And how bumpy could it get?
Housing economists are weighing the likely impact of a hard landing/recession versus the soft landing Fed Chairman Jerome Powell is aiming for. Another question worth answering, though, is what type of landing would the housing market generally prefer?
Housing affordability isn’t likely to see much (if any) improvement while the plane circles the runway.
But while the Fed weighs its options for future Federal Open Market Committee (FOMC) meetings, it’s worth taking stock of where we are and what could happen if all goes to plan.
Lance Lambert, Real Estate Editor for Fortune, joined Byron Lazine, Lisa Chinatti, and Tom Toole in last week’s episode of the Knowledge Brokers Podcast to consider that possibility and to share his take on the U.S. housing market.
What could happen to the housing market if there’s a soft landing?
The big question right now is whether Fed Chairman Jerome Powell can really pull off the “soft landing” many are hoping for, where we avoid recession and a nationwide surge in job losses.
Given that possibility, Byron asked what would happen to housing in the next 12-24 months if we get that soft landing. What would that look like for buyers, sellers, and home builders?
Lance approached the question by identifying the three possible scenarios as “buckets.”
There’s hard landing/recession. There’s soft landing—inflation is tamed, we don’t have recession, and the Fed eases up on rates. And then, there’s the third bucket which is where we are right now, which is no landing/higher-for-longer. And it’s a question of ….in that theory, we avoid recession, but which of the other two buckets are we in? Does inflation start to be a little more sticky? Or does the Fed feel like we’ve actually landed this plane? And so, those two latter buckets would of course affect the answer there. Because if it’s the no landing, it’s probably more of a depressed housing transaction volume.
A soft landing, appealing as it sounds, isn’t necessarily what would result in improved housing affordability—i.e., lower rates and lower home prices—-in the shortest time frame. And affordability is something many buyers would love to see sooner rather than later.
On the other hand, with recession also comes a stronger likelihood of job losses. While that could increase the number of new listings as people losing their jobs rush to sell their home before the bank forecloses on them, it would not necessarily result in a higher homeownership rate.
I think it’s the middle bucket that the industry would like, which is soft landing, inflation tamed, Fed starts cutting rates, the affordability aspect of the market improves, transaction volumes go up. The interesting question is—put aside the middle bucket, the soft landing, the sweet spot. Which would the industry prefer: the no landing/higher-for-longer, or the hard landing/recession?
Because that latter one…would bring rates down the fastest of all of them, and it probably has way more transaction volume than the no landing/higher-for-longer bucket. And then, plus, the longer you stay in that higher-for-longer/no landing bucket, your odds of recession are still there. Because you haven’t landed one way or the other still.
What scenario would lead to more affordable housing prices?
Of the three scenarios explored in Friday’s episode, a recession would be the most likely to result in a decline in home prices.
Recession also gives probably the highest chance of getting prices in a more affordable range, certainly closer to what the majority of buyers can afford—because those rates come down but also, in a recession, you would envision more people having to sell because they’re losing their job, which could create more inventory.
Byron also made the point that, with a soft landing, home prices would more likely go up, thanks to pent-up demand and buyers re-entering the market and competing for available listings.
Lance referenced some industry data sources—including CoreLogic and Zillow—that argue we’ve already bottomed out with prices. Other sources are holding out until they see the second half of the year because of how seasonality could impact the market.
I do think that a lot of the models that I look at do believe that a recession/hard landing is most likely to pull prices down further, although there’s some disagreement there. And then, if we stay in this higher-for-longer period, I think it’s a little uncertain still how the price side works out…. When I say ‘uncertain,’ that could mean going down 3-4%… I’m not talking about risk of something dramatically to the downside right now.
What role does the lock-in effect play—and how do we get out of it?
Lisa Chinatti asked about the lock-in effect and specifically what will change it. Because while many would-be sellers are holding onto their homes, locked into mortgage rates of 5% or lower, other factors come into play that could drive more of them back into the market.
While no one can say with certainty that rates will go down to 6% by the end of the year, let alone closer to 5%, a more modest drop in rates could still bring more buyers to the market, ramping up competition and driving up home sale prices.
So, what will ultimately loosen the hold of the lock-in effect?
Acceptance and affordability improvements. I think those would be the top two. And the third, which actually goes back to the first and second, is time.
At some point, buyers and homeowners who are holding off because of high mortgage rates will accept them as the new normal and will no longer be deterred or inclined to wait until they see a significant drop.
Also, not all buyers and homeowners are affected by mortgage rates to an equal degree. Baby Boomers, as Byron pointed out, are most protected because of the wealth they’ve accumulated. They’re in a better position to pay all cash, which effectively insulates them from mortgage rate increases. It also gives them an edge over buyers in need of financing.
Retired Boomers are also insulated from the impact of a recession on the job market, though business owners of all generations are likely to feel the effects.
So, which bucket are we in—and which do we want?
Mr. Lambert’s description of our present situation as up in the air (no landing) echoes what CNBC’s Jim Cramer has said about the housing market recently, arguing that “the plane is still in the air and doesn’t have any intention of landing.”
While we remain in this holding pattern, two questions come to mind:
- Will the landing be hard or soft—and which type of landing would be most beneficial to the housing market?
- When will the landing happen—whether hard or soft?
As of yet, economists can only speculate based on available data and what they expect the Fed will do next.
As for newer agents—especially those with no experience of the 2010-2013 housing market—in a decade or less, they could be dealing with a market that’s essentially flipped. Byron described what that was like:
You had to beg another agent to bring you a buyer and get a showing. We’re not talking about an offer. You were begging, in certain price points in the Northeast, for showings. Because that’s how little activity there was. Months of supply were through the roof.
He referenced Ivy Zelman’s projection that, 10 years from now, we’ll have an “inventory problem,” meaning we’ll have a glut of inventory because of Boomers exiting their homes—especially in areas like Florida where Boomers have been migrating to.
He asked if Lance saw the potential for this kind of turnaround in the next 10 years.
The answer is 100%. And I say that because if you look back at housing cycles—and I don’t mean to say that 100% what she said is going to happen—but 100% an environment ten years out can be dramatically different and different in ways that we’ve never seen before. All of these variables and factors can all be flipped in many different directions. And you just look at the market that we’re in. It’s a very, very unique market historically speaking—this hyper-low inventory, the dramatic upswing that we saw in prices, then the rate shock is one of the biggest ones in history… I think it’s possible that the market could be very different in ten years, especially if we’re going to continue to have any type of overheating that continues to push affordability to the top—and we stay there for a long time.
Lambert went on to remark on last year’s home price correction—the second-biggest of the post-WWII era—and how it didn’t come with a construction bust.
Here we had the second-biggest dip in nominal prices but no housing bust. And what that goes to is every cycle is very, very different. And the factors that lead into them are different. And what it is is this time we weren’t overbuilt like those other construction busts.
George Ratiu made a similar comment in episode 20 of the Knowledge Brokers Podcast when he explained why consumers are not paying too much on housing.
The overheating that occurred during the pandemic housing boom pushed builders’ margins to the highest in history. And so, they were able to just take those margins, spread them into buy-downs, spread them into some other incentives, spread them into some price-cuts, and meet the market again and avoid a bust, which is actually good for the economy and good for anyone who cares about housing supply.
When can we expect a landing (of any kind)?
Fed Chairman Jerome Powell seems intent on continuing the rate hikes until such a time as he believes we’re out of the woods with inflation.
Unfortunately, the Fed still relies on an outdated measure for shelter inflation, resulting in a higher CPI and, consequently, a stronger likelihood of continued rate hikes—until it’s time to backpedal for dear life.
To me, the more interesting thing is less what the Fed decides…and more just ‘What are these next 3-4 months with data…looking like?
