Fannie Mae released a commentary last week indicating that it expects a recession in 2024, with a rebound coming the following year. The combination of employment gains and a deceleration in inflation means that a soft landing in 2024 is much more likely. Further, Fannie Mae expects a bottoming out of home sales in 2024 as homeowners suffer from the “lock-in effect” due to rising interest rates.

Source: Fannie Mae (November 2023)

Doug Duncan, Fannie Mae Senior Vice President and Chief Economist, comments: 

 “The slowdown in employment gains has continued, and stress is growing on consumers’ ability to sustain their high levels of spending – unsurprising results that we attribute to the often-lagged economic effect of monetary policy tightening. At the same time, housing has been and continues to be under serious affordability pressure, resulting in recessionary-level home sales activity. While many current owners with low mortgage rates will likely continue to be discouraged from listing their homes, we expect mortgage rates to trend modestly downward in 2024, which should help kickstart a gradual recovery in home sales into 2025.”

Source: Fannie Mae (November 2023)

Tim Smart of U.S. News comments on a Conference Board Index, which points to a decrease in economic sentiment in October. The index decreased 0.8% to 103.9, a bigger drop than expected last month. This points to a mild recession in the near term, similar to the predictions above by Fannie Mae.

“The Conference Board expects elevated inflation, high interest rates, and contracting consumer spending – due to depleting pandemic saving and mandatory student loan repayments – to tip the US economy into a very short recession.”

Joseph Adinolfi of Morningstar points to two other indicators signaling recessionary times. “[E]mployment in logistics jobs like trucking has cratered this year as pandemic-related overhangs in demand for goods have persisted…[and] happens to be one of the best cyclical canaries to have down your coal mine…[in addition to] the temporary-help subset of services employment, which has also seen a decisive downturn this year, mirroring a pattern that played out ahead of recessions in 2001 and 2007.”

Rents

Rents also continued their downward growth trajectory, according to multiple reports, highlighting the easing of shelter costs which has been the largest growth component of core inflation. Apartment List released its monthly report showing that nationwide median rent fell 0.9% to $1,340 in November. This is the fourth consecutive month of negative rent growth.

Source: Apartment List (November 2023)

“Year-to-date, rents are up just 0.2 percent and trending slower than every previous year measured by our index, aside from 2020. During the steady-state years of 2017 to 2019 before the pandemic, rent growth from January through November averaged 2.9 percent. Rent growth has not just cooled from recent peaks, but is low even compared to the modest growth of pre-pandemic years, as prices are being kept in check by sluggish demand colliding with a robust supply of new inventory hitting the market.”

Similarly, Zumper found that the national median rent for one and two bedrooms was down month-over-month, now sitting at $1,505 (-0.4% month-over-month) and $1,862 (0.2% month-over-month), respectively. “Cities across the Sun Belt are seeing more significant price drops, as new supply comes online in markets like Phoenix and Austin while, simultaneously, migration to these areas is slowing.”

Source: Zumper (November 2023)

As such, landlords are offering more renter concessions due to weakening demand, according to Zillow. Data shows that 30% of rental listings offered at least one concession last quarter, with 43 of the 50 largest U.S. metros having more concessions now than in 2022. These incentives include free months of rent or parking to attract new tenants. 

Finally, Redfin released its monthly rental report showing vacancy rates hit 6.6% in Q3, the highest level since the Q1 of 2021. “By comparison, the homeowner vacancy rate was 0.8%—the second lowest level in records dating back to 1956 (the lowest was in the prior quarter).”

Source: Redfin (November 2023)

New construction

There was a lot of new data on the construction sector coming out of the National Association of Home Builders (NAHB). Robert Dietz kicks us off by showing that the custom home construction sector is decreasing in popularity, with 50,000 total custom building starts during Q3, a 17% decline compared to last year. Dietz notes that this downward trend is “consistent with weakness experienced throughout the home building sector.” 

Rose Quint of NAHB reports that demand for homebuying remains elevated, with “interest for newly built homes continues to rise as the collapse of existing home inventory leaves new homes as the only option in many areas.  In the third quarter of 2023, 27% of prospective buyers were looking to buy new construction, up for a third consecutive quarter after falling to 20% in the final quarter of 2022.”

Source: NAHB (November 2023)

Manny Garcia of Zillow reports on new construction, highlighting that co-buying of new housing construction is rising, given consumers’ affordability and debt concerns. “Cobuying – purchasing and sharing ownership of their home with at least one other person – is the norm for most buyers (62%) and even more so for those who buy new construction (66%). This difference is largely due to new construction buyers being more likely to cobuy with a spouse or partner. New construction and existing home buyers were similarly likely to buy with a friend or relative.”

Finally, Robert Dietz of NAHB reports that new home construction sizes are declining. Using Census data, NAHB has found that the median single-family square floor area was 2,221 square feet, one of the lowest readings since 2010. The average square footage for new single-family homes sits at 2,430.