U.S. Markets close in 2 hrs 24 mins
  • S&P 500

    3,706.87
    +59.58 (+1.63%)
     
  • Dow 30

    29,615.09
    +480.10 (+1.65%)
     
  • Nasdaq

    10,989.31
    +159.80 (+1.48%)
     
  • Russell 2000

    1,709.85
    +47.35 (+2.85%)
     
  • Crude Oil

    81.49
    +2.99 (+3.81%)
     
  • Gold

    1,670.50
    +34.30 (+2.10%)
     
  • Silver

    18.87
    +0.53 (+2.91%)
     
  • EUR/USD

    0.9741
    +0.0143 (+1.4904%)
     
  • 10-Yr Bond

    3.7370
    -0.2270 (-5.73%)
     
  • Vix

    30.96
    -1.64 (-5.03%)
     
  • GBP/USD

    1.0891
    +0.0160 (+1.4877%)
     
  • USD/JPY

    144.0050
    -0.7860 (-0.5428%)
     
  • BTC-USD

    19,569.57
    +577.83 (+3.04%)
     
  • CMC Crypto 200

    446.00
    +17.22 (+4.02%)
     
  • FTSE 100

    7,005.39
    +20.80 (+0.30%)
     
  • Nikkei 225

    26,173.98
    -397.89 (-1.50%)
     

‘We’re heading into a housing recession’: Here’s what the NAHB CEO sees in real estate right now — and why it spells trouble for the economy

·3 min read

Housing, which is a key segment of the national economy, looks extraordinarily weak right now, according to a recent report by the National Association of Home Builders (NAHB).

‘We’re heading into a housing recession’: Here’s what the NAHB CEO sees in real estate right now — and why it spells trouble for the economy
‘We’re heading into a housing recession’: Here’s what the NAHB CEO sees in real estate right now — and why it spells trouble for the economy

“We’re heading into a recession,” NAHB CEO Jerry Howard told Bloomberg in a recent interview. He described how a rapid decline in homebuilding and demand for new homes could drag the national economy lower.

Here are some of the highlights of Howard’s thesis.

Don’t miss

Housing leads every recession since Second World War

Residential real estate is an integral part of the American economy. In fact, housing activity contributes between 15% to 18% of gross domestic product (GDP) every year, according to the NAHB. A slowdown in this sector naturally pulls down the rest of the economy.

A decline in home building and buying has led to every recession since the end of the Second World War, according to Howard. The association’s latest report indicates that buyers and builders are both pulling back from the market yet again, which could be a leading indicator for another recession on the horizon in 2022.

Builders are holding off

Homebuilders face multiple demand- and supply-side pressures.

On the demand front, potential homebuyers have receded from the market. Existing home sales slid 5.4% in June. Meanwhile, borrowing capacity has been curtailed by rising interest rates. The average mortgage rate has accelerated at the fastest pace in 35 years. A 15-year fixed rate mortgage is now about 4.8%, up from 2.2% a year ago. These factors have effectively destroyed demand.

Meanwhile, the supply chain for home building material and the cost of labor continues to increase the cost of building new homes. This is why homebuilders' sentiment dropped 12 points in June, according to the NAHB survey.

A dangerous situation

The fundamental weakness in both demand and supply-side factors creates a “dangerous situation,” said Howard. Housing has not only led the country into every recession, but it has also led the nation out of every recession since the Second World War. This time the recovery could be slower.

There’s no easy solution to the lack of labor and supply chain disruptions that plague the industry. If these issues persist, the economic recovery could take longer. Howard believes regulators need to get involved to reignite growth.

Regulators need to get serious

Policy changes are essential to resolve issues in the housing market, according to Howard. He suggests that regulators try to secure a deal with Canadian authorities to improve the supply of lumber into the U.S. That would significantly reduce the cost pressures on homebuilders.

Policies to encourage labor supply would also help. Better training for skilled labor and higher immigration of tradespeople would improve homebuilder sentiment.

Some regulations, however, need to be reduced to boost the homebuilding sector. Development charges and prohibitive planning regulations on the state and local level could be a bottleneck on housing supply.

Lowering these barriers could play a part in stabilizing homebuilding and helping the national economy course-correct. However, these recommendations may not be enough to prevent the near-term pressures homebuilders face.

Some economists believe a housing-led recession may be inevitable — if it hasn’t already begun.

What to read next

  • Sign up for our MoneyWise investing newsletter to receive a steady flow of actionable ideas from Wall Street's top firms.

  • US is only a few days away from an ‘absolute explosion’ on inflation — here are 3 shockproof sectors to help protect your portfolio

  • ‘There’s always a bull market somewhere’: Jim Cramer’s famous words suggest you can make money no matter what. Here are 2 powerful tailwinds to take advantage of today

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.