The housing recession is back on, Wells Fargo and Goldman Sachs agree

Just hours after the U.S. Bureau of Economic Analysis published data on Thursday showing that residential fixed investment growth was positive last quarter, following nine straight quarters of contraction, Wells Fargo released a report titled: “Rising borrowing costs stand to tip the housing sector back into recession.”

The recent run-up in mortgage rates—with the average 30-year fixed mortgage rate sitting at 7.92% on Monday—means that taking into account mortgage rates, incomes, and house prices, October 2023 will go down as the least affordable month for U.S. housing this century. In the eyes of Wells Fargo, that means housing activity will continue to contract.

Wells Fargo analysts wrote: “After perking up at the start of year, nearly every facet of housing activity has shown signs of relapse as the Fed has maintained a restrictive policy stance and mortgage rates have breached 7.0%. In September, existing home sales extended a three-month streak of declines and dropped to a 3.96 million-unit pace, the slowest sales pace since October 2010. Mortgage applications for purchase have retreated in recent weeks and, as of October 20, have fallen to the lowest level since 1995. In September, the Fannie Mae Home Purchase Sentiment Index reported that 84% of consumers were pessimistic about homebuying conditions, a new survey high. Single-family construction has not yet turned down, but the NAHB Housing Market Index, which reflects home builder confidence, has declined since July, suggesting new construction may soon begin to slow.”

While Wells Fargo doesn't anticipate a significant correction in U.S. existing home prices, they do believe that up to two-thirds of the national home price gains for 2023 could be eroded by year-end.

Through July, U.S. home prices as tracked by the Case-Shiller National Home Price Index are up +5.3% this year. Wells Fargo expects U.S home prices to end the year up just +1.8%. For that to happen, national home prices would need to fall over the final months of 2023. (In the morning, the lagged Case-Shiller index will publish its results for August).

Beyond 2023, Wells Fargo expects U.S. home prices to rise +2.5% in 2024 followed by +4.4% in 2025. If Wells Fargo is right, U.S. home prices would end 2023 down -2.8% from June 2022 (i.e. the peak of home prices last year), end 2024 down -0.4% from June 2022, and end 2025 up +4.0% above June 2022.

Considering Wells Fargo's expectation of national house prices gradually increasing through the end of 2025, one might wonder why they refer to this as a "housing recession."

The reason is that the term "recession" typically implies a decline in economic activity rather than necessarily falling prices. In most full-blown recessions, overall consumer prices, i.e., inflation, continue to rise despite economic contraction and job losses.

From that lens the U.S. housing market is very much in recession in Q4 2023.

Both Goldman Sachs and Wells Fargo anticipate that residential fixed investment (the core of "housing GDP") will experience a double-digit percentage decrease in 2023, followed by a slight decline in 2024.

Housing recessions are nothing new, of course. These so-called "housing recessions" typically occur when the Fed transitions into quantitative tightening mode in an effort to control the economy and curb inflation.

Wells Fargo invoked that history in their note: “The National Association of Realtors recently sent a letter to fiscal and monetary policymakers proposing a list of actions that, in their view, would reduce mortgage rates and bolster housing activity, which generally has turned lower since the start of 2022 when the Federal Reserve first began raising the federal funds target range. It is not uncommon for policymakers to hear directly from industry associations about market conditions. The letter is reminiscent of when, in 1980, home builders sent a piece of lumber to the Federal Reserve asking for “help” in boosting housing demand via lower interest rates. In the late 1970s and early 1980s, high inflation led to tighter monetary policy and sharply higher mortgage rates. According to Freddie Mac, the 30-year mortgage rate peaked at nearly 19% in 1981. The run-up in rates spurred a severe contraction in new single-family construction, which dropped nearly 65% between April 1978 and February 1982. The plea for assistance from housing industry participants, both in the early 1980s and more recently, illustrates the severe impact higher interest rates can have on the residential sector.”

On Saturday, the Lance Lambert House Price Tracker went live. The beta version has metro-level analysis; however, county and ZIP code data will be available soon. This offering is for just ResiClub Pro members.