Issue link: https://digital.nexsitepublishing.com/i/1479050
BY ROBERT DIETZ, PH.D. CHIEF ECONOMIST NATIONAL ASSOCIATION OF HOME BUILDERS @DIETZ_ECON T he most important macro question for housing is whether the U.S. economy will fall into a recession over the coming quarters. Given the unsustainably tight labor market and persistent, elevated inflation, history indicates that a recession over the next two years is inevitable. This runs counter to what the nation's central bank, the Federal Reserve (Fed), is trying to achieve—namely a soft landing that brings inflation down without a significant economic downturn. Over the last 60 years, every time the unemployment rate has fallen below 6% and the inflation rate has risen above 4%, tightening by the Fed has produced a recession in the following two-year period (the April unemployment rate was 3.6% and the rate of inflation per the CPI was 8.2%.) The harbingers of a recession and slowing housing market are already priced into financial markets. The Fed is set to increase Recession in the Forecast Follow more market trends and forecasts at nahb.org/news-and-economics/housing-economics interest rates by 0.5% at least twice more this year. This, along with other factors, such as quantitative tightening, will place additional upward pressure on mortgage rates, which have already increased from 3.1% at the start of 2022 to 5.1% at the end of May. NAHB is forecasting a recession for mid-2023. Housing markets will weaken leading into this macro event. However, as housing leads the economy, housing markets will stabilize and strengthen during the back half of the recession as inflation is brought under control and interest rates moderate. This is the "hard landing" the Fed is trying to avoid. While our forecast is negative, we do believe we can rule out a "crash landing," wherein a recession combines with a financial crisis leading to significant home price declines. The housing market is too underbuilt to result in another Great Recession. Policymakers can help mitigate the worst effects of the coming recession. Federal, state, and local governments should find ways to address the underlying causes of inflation: lack of skilled labor for sectors like construction, lack of building materials and energy for businesses expansion, flawed zoning and land use rules, costly regulatory policies, and more. However, thus far, there is little indication that any of these strategies are underway, leaving the inflation fight entirely to the Fed. And the Fed's only option is slashing demand until inflation levels off. Given the unsustainably tight labor market and persistent, elevated inflation, history indicates that a recession over the next two years is inevitable. 48 master BUILDER | FALL 2022 MEMBERSHIP VALUE