In a series of insightful posts on X last week, renowned economist Mark Zandi raised concerns about the current state of the housing market. He indicated that he had initially sent out a “yellow flare” regarding the housing market's health just a few weeks ago. However, given the rapidly worsening conditions, he now believes a “red flare” is more appropriate. According to Zandi, “Home sales, homebuilding, and even house prices are set to slump unless mortgage rates decline materially from their current near 7% soon.” Unfortunately, he considers such a decline unlikely.
Despite an unexpected rise in existing home sales in May, the overall pace remains sluggish, marking the slowest sales rate for any May since 2009. This indicates that the typically bustling spring selling season has significantly underperformed. Compounding these issues, sales of new single-family homes plummeted by 13.7% in May compared to the previous month. Additionally, single-family housing starts fell by 4.6% in June, with permits also showing a downward trend.
Zandi elaborated that while home sales are currently “uber depressed,” homebuilders had been providing rate buydowns to support sales. However, he notes that builders are beginning to withdraw from this strategy due to high costs. “It’s simply too expensive,” Zandi remarked. A significant indicator of this trend is the postponement of land purchases by many builders from land banks, which suggests that new home sales, starts, and completions are likely to decline further.
Though home prices had previously shown resilience, Zandi warns they are now stagnating and poised to decline as the near-7% mortgage rates severely dampen demand. The latest Case-Shiller home price report revealed a 0.3% monthly drop in the 20-city index for April, a more significant decrease than the revised 0.2% dip recorded in March. Furthermore, a recent survey from the National Association of Home Builders indicated that 38% of builders reduced prices in July, an increase from 37% in June, 34% in May, and 29% in April.
An additional factor exerting downward pressure on home prices is the increasing supply of homes. Home listings have been on the rise, as homeowners with low pre-pandemic mortgage rates eventually find it necessary to sell their properties to purchase new homes at higher rates. “Given their demographic and job situations, locked-in homeowners must move,” Zandi stated. “They can only work around these needs for so long.”
Current market conditions are so unfavorable that many homeowners who initially listed their properties are opting to take them off the market after failing to secure a buyer at their asking price. Delistings have surged by 35% year-to-date and 47% year-over-year in May, significantly outpacing the 28.4% and 31.5% growth in active listings, respectively, according to a report from Realtor.com.
Zandi emphasized that these developments collectively spell bad news for the overall economy, which is already grappling with the effects of President Donald Trump’s tariffs. He warned that “Housing will thus soon be a full-blown headwind to broader economic growth,” contributing to a growing list of concerns about the economy's prospects for the remainder of the year and into early next year.
In a similar vein, analysts at Citi Research issued a warning in May, referencing economist Ed Leamer, who famously noted that residential investment serves as a key leading indicator for impending recessions. Citi highlighted the decline in permits for single-family-home construction and the rising effective supply of homes amid weak demand, alongside a monthly decrease in median home prices for existing homes. “Residential fixed investment is the most interest rate-sensitive sector in the economy and is now signaling that mortgage rates around 7% are too high to sustain an expansion,” Citi concluded.
