Research points to a challenging phase for real estate amidst economic uncertainty and elevated inflation
The US housing market is currently experiencing its sixth major downturn since the late 1960s, according to a recent report by EPB Research analyzing the state of the market in May 2023. As home prices continue to decline in 75% of major cities, concerns grow about the market’s overall stability and its potential impact on the broader economy.
One of the most reliable indicators of home prices, the Case-Shiller Home Price Index, reveals that national home prices have started to decline, following a peak reached in the summer of 2022. This decline, although modest at around 3% nationally, varies significantly across regions. Some areas have experienced sharper declines, while others remain closer to their peak levels.
Historical analysis of previous housing market cycles provides valuable insights into the current situation. During the 1990 recession, home prices fell by approximately 2%, and it took 37 months for prices to recover and reach a new peak. Conversely, the 2001 recession did not result in any significant home price decline. The 2008 recession witnessed a drastic crash in home prices by nearly 30%, and it took a prolonged 116 months for a new peak to be established.
The ongoing housing market downturn, characterized by a 3% decline in prices and a duration of 10 to 11 months, signals a challenging phase for the industry. The fact that 75% of cities are experiencing declining home price growth underscores the broad scope of the market correction.
The implications of a declining housing market on inflation cannot be ignored. Historically, downturns in the housing market have had varying effects on inflation. For instance, the 1990 recession saw a modest 2% decline in home prices, which contributed to a relatively lengthy period of 37 months before prices rebounded. On the other hand, the 2008 recession, marked by a significant 30% crash in home prices, resulted in a protracted 116-month recovery period.
It remains uncertain how the current housing market downturn will compare to past economic downturns, particularly in terms of the market bottom. However, there is consensus that the market reached a clear peak in 2022 and continues to exhibit a downward trend.
The decline in home prices, coupled with the uneven distribution of market corrections across cities, raises concerns about potential vulnerabilities in the real estate sector. Some cities are already experiencing substantial declines, even without significant disruptions in the labor market. While other cities have witnessed a slowdown in momentum without significant price reductions.
As the US housing market faces headwinds and uncertainty, policy makers and the Fed are closely monitoring these developments, recognizing the potential implications for the broader economy.