Home Sales Trends Vs Recessions

Existing home sales are slowing. Can a recession be far behind?

Please consider U.S. Housing-Market Trends Suggest Recession Around Election Time, 2020.

Ten years ago, in September 2008, plunging home prices pushed Lehman Brothers into bankruptcy, fueling a financial crisis that sent the United States, and much of the world, into a deep recession.

One metric that signaled trouble in the years leading up to the crisis was an expanding gap between the growth in home prices and household income—as shown in the left-hand shaded circle above. When income can’t keep pace with home prices, the latter must come down. Overleveraged home “owners” default on their mortgages, creating a housing glut that drags prices down further. Falling home values slow consumer spending, and therefore GDP growth, by way of the so-called wealth effect—that is, consumers cut spending when their assets fall in value. In the United States, according to one Federal Reserve study, consumption drops by $2.50-5.00 for every $100 decline in housing-market net worth.

With the Federal Reserve in tightening mode, and mortgage rates headed up, there is good reason to expect this drop to continue. Assuming it does so on the pace it’s been on since 2015, home-sales growth will fall to levels accompanying prior recessions by the end of 2020—right around election time.

New Home Sales

New home sales are in a downtrend, but year-over-year sales of new homes do not show the same pattern as the feature chart.

New Home Sales Year-Over-Year

Both the new and existing series seem very noisy as any kind of recession predictor.

Unfortunately, the Fred existing home sales series only dates back one year or I would put year-over-year rates on the same chart to compare.

Sales of New vs Existing Homes