It has been widely reported that the housing market is in a recession. Though prices remain high, sales of existing homes were down 30% as of August 2022, as were sales of new homes. Housing declines are historically a harbinger for recessions, but does this mean that a recession is imminent?
Figure 1: New Home Sales, Real Home Price Growth and Recessions, 1963-2010
Though prices are typically the most widely-discussed housing statistic, they tell us a partial, and often misleading, story about the overall state of the housing market. This is because housing typically follows a volume cycle, not a price cycle.
Figure 1 shows the growth in new home sales and real home prices since 1963. Recessions are shaded. The more extreme movements in the red line make it clear that sales have a more volatile cycle than prices. Prices exhibit drops during recessions, but they are minor. Even during the Great Recession — the biggest home price crash in recorded history — the price decline was dwarfed by the decline in sales volumes. The deepest year-over-year decline in prices was 14%, but home sales dropped 40%.
Figure 2: Year-Over-Year Changes in S&P CoreLogic Case-Shiller Index, 1964-Present
Prices exhibit a clear downward stickiness. Figure 2 emphasizes this point, showing year-over-year changes in the CoreLogic S&P Case-Shiller Index. The only notable decrease in nominal prices that occurred was during the Great Recession.
Aside from that, it has not been a matter of if prices are increasing but rather by how much. This is natural. During recessions, there is less demand, but sellers are forward-looking. Rather than sell their homes now, many would rather wait out downturns until demand increases and they don’t have to sell at a discount. So instead of the same number of sales occurring at a lower price, fewer sales occur at similar prices. Certainly, there are always sellers who cannot delay and will have to take a discount, but in the past, those cases have been few. The exception is the Great Recession when house prices went on a half-decade-long slide. What was different in this situation? Borrowers were unable to continue to pay their mortgages, which wasn’t the case in previous recessions.
Another clear feature in Figure 1 is that housing declines are harbingers for recessions. This has been widely documented in research[1]. Because of the resistance of prices to drop, however, the recessions have only been preceded by downturns in sales, rather than prices. This is particularly notable with new home sales[2]. Home sale declines have preceded 9 of the last 12 recessions. Whether or not housing declines cause recessions is a matter of debate, and with the exception of 2007, there are other plausible explanations for the impetus behind a recession. It is easier to see housing as a component of the business cycle that expresses itself before the others, but they are all still part of the same cycle[3].
Figure 3: 12-Month Rolling Average of New Home Sales Since 2015
This brings us back to the current “housing recession.” Figure 3 focuses on the 12-month rolling average of new home sales since 2015. The recent sharp correction is clear. Similar events in the past have been followed by recessions.
Does that mean a recession is on the way now? Not necessarily. Recently, housing has been losing its status as a reliable predictor of recessions. The connection has been weaker statistically[4]. If there is a recession next year, housing will be at 2 for 4 since 2000. If there isn’t a recession, housing will be 1 for 4, with the only recession it predicted being one where it was the cause of the recession. One could call the COVID and dot-com recessions different, but the world has changed a great deal over the past 100 years. This suggests that present-day recessions and housing markets are simply of a different nature than the ones of the last century, and the prior connection is fading.
[1] Edward E. Leamer, 2007. “Housing is the business cycle,” Proceedings – Economic Policy Symposium – Jackson Hole, Federal Reserve Bank of Kansas City, pages 149-233.
[2] New home sales are shown because information on existing home sales is less reliable for pre-1990s data.
[3] Case in point, car sales are also a reliable predictor of recessions. Yet no one points to cars as the cause of any recession.
[4] Green, R. K. (2022). Is housing still the business cycle? Perhaps not. In Handbook of real estate and macroeconomics (pp. 269-283). Edward Elgar Publishing.
