The Federal Reserve Bank of Dallas released a report last month discussing the possibility of a housing bubble. According to the authors:
“Our evidence points to abnormal U.S. housing market behavior for the first time since the boom of the early 2000s. Reasons for concern are clear in certain economic indicators—the price-to-rent ratio, in particular, and the price-to-income ratio—which show signs that 2021 house prices appear increasingly out of step with fundamentals.”
“Based on present evidence, there is no expectation that fallout from a housing correction would be comparable to the 2007–09 Global Financial Crisis in terms of magnitude or macroeconomic gravity. Among other things, household balance sheets appear in better shape, and excessive borrowing doesn’t appear to be fueling the housing market boom.”
Shawn Tully of Fortune responds to the above statements, noting that “my take is a lot more favorable than that of the Dallas Fed’s economists. Unlike the dynamics governing the last ramp-up, the driving force isn’t wild speculation. It’s a whole new set of fundamentals, encompassing rising but still relatively favorable mortgage rates, record low inventories, homeowners benefiting from modest leverage, and baby boomers’ hankering for keeping the big family colonial instead of downsizing to a condo or townhouse.”
Last week, Lance Lambert of Fortune reported on Zillow downgrading its housing price increase for 2023, revising its forecast to an increase of 14.9% between March 2022 and March 2023. That’s 2.9% lower than their prediction last month.
Source: Zillow (April 2022)
Ben Carlson of A Wealth Of Common Sense released an article last week titled, 4 Reasons the Housing Market Won’t Crash. In it, Carlson notes that the millennial homebuying demographic, low housing supply, low sales supply, and strong consumer balance sheets will all help keep the housing market from crashing.
Erik J. Martin of The Mortgage Reports agrees with the above, reporting that high demand and low inventory aren’t going anywhere based on current forecasts. This will serve as a buffer to any market forces that will push housing prices down such as higher interest rates.
But a recession may be coming
That said, many economists and experts believe that a recession is in our future. Fannie Mae, according to Housing Wire, has cut its projected mortgage origination for single-family homes in 2022 from $3 to $2.8 trillion. Further, it decreased its 2023 forecast from $2.7 to $2.4 trillion. In 2021, the total origination number hit $4.5 trillion. According to Fannie Mae: “We’ve updated our 2023 forecast to include a modest recession, but one that we do not expect to be similar in magnitude or duration to the recession of 2008.”
Similarly, Rich Miller of Bloomberg reports on an announcement by economists at Deutsche Bank, which is predicting a U.S. recession in 2023. Similar to Fannie, the bank doesn’t see this as a major recession, and they also don’t expect it to last that long.
Felice Maranz and Tatiana Darie of Bloomberg also report on a Markets Live weekly survey, showing that 84.1% of respondents expected a U.S. recession in or before 2024. Almost 50% believed a recession would occur in 2023.
Source: Bloomberg (April 2022)
Another Bloomberg article by Max Reyes outlines how the “heads of some of the largest U.S. regional banks see mounting risks for a recession brought on by the Federal Reserve’s interest-rate hikes, even as those increases are set to bolster lending revenue.”
Lastly, Gregg Rob of MarketWatch reports on an announcement by Goldman Sachs, which sees the chances of a recession in the next 24 months as 35% likely. “The bank’s economists see the odds of a recession at about 15% in the next 12 months, with the odds rising to 35% over the next 24 months.”
ATTOM Data Solutions released new data on the state of foreclosures in America following almost two years of a moratorium due to the pandemic. This kept foreclosure rates artificially low, which are now on an upward trajectory. Specifically, there was a total of 78,271 properties with a foreclosure filing during Q1 2022, which is up 39% quarter-over-quarter, and up 132% year-over-year. That said, by historical standards, we are still well below the rolling average.
Source: ATTOM Data Solutions (April 2022)
According to Rick Sharga, executive vice president of market intelligence for ATTOM:
“Foreclosure activity has continued to gradually return to normal levels since the expiration of the government’s moratorium, and the CFPB’s enhanced mortgage servicing guidelines…But even with the large year-over-year increase in foreclosure starts and bank repossessions, foreclosure activity is still only running at about 57% of where it was in Q1 2020, the last quarter before the government enacted consumer protection programs due to the pandemic.”
Sharga continues, noting that this is only just the beginning of the increase in foreclosure rates:
“It’s likely that we’ll continue to see significant month-over-month and year-over-year growth through the second quarter of 2022, but still won’t reach historically normal levels of foreclosures until the end of the year at the earliest, unless the U.S. economy takes a significant turn for the worse.”
Suzannah Cavanaugh of The Real Deal reports on the above data, highlighting that Chicago, New York, LA, and Houston lead the pack of metros with the highest foreclosure rates. Further, “on a statewide level, California reported the highest number of foreclosure starts for the first three months of 2022 at 5,378. Florida and Texas took second and third place with 4,707 and 4,649 starts, respectively.”