3 housing-market warning signs that economists are monitoring

⏳ TL;DR

• Housing market slowdown is raising recession concerns
• Three key warning signs: falling home prices, declining investment, and labor market impacts
• Economists warn that a prolonged housing slump could trigger broader economic issues
• Current indicators suggest a slowdown rather than an immediate recession

🪄 Ancher's Edits

The US housing market is at a crossroads, with economists watching closely as several warning signs emerge. What was once a pillar of economic strength is now showing signs of strain, and the implications could ripple far beyond real estate.

It started with a quiet but persistent slowdown. Existing home sales dropped 0.7% year-over-year in May, following a particularly sluggish April. New home sales fell nearly 14% in the same month. These numbers might seem small, but they represent a 16-year low in sales speed, according to the National Association of Realtors. The situation is even worse for new homes, where the market has been frozen for months.

"Housing is the quintessential leading indicator," said David Rosenberg, CEO of Rosenberg Research. "If the housing market falls a long way, we will obviously get much lower transactions." This isn't just about houses—it's about the people who build them, sell them, and buy them. It's about the economy itself.

Here are three key signals economists are monitoring:

1. A 5% Drop in Home Prices

Home prices falling significantly could open up the door to a host of negative consequences for the US economy. Lower home prices tend to dent how consumers feel about their finances, triggering what economists call the "wealth effect." Losses on paper from declining home values can cause consumer sentiment to sour and lead to reduced spending.

While most of the market is still seeing prices grow, some areas have seen declines, and increases are slowing. The S&P CoreLogic Case-Shiller US National Home Price Index rose 2.7% year-over-year in April, down from 3.4% the previous month. Oliver Allen of Pantheon Macroeconomics estimates that a 5% drop in home prices would create a "noticeable drag" on consumer spending and make a recession a "serious concern."

David Rosenberg believes home prices have room to fall, pointing to the growing backlog of unsold new homes. With new unsold housing inventory at its highest level in around 15 years, he says the housing market's deflation is in its early stages.

2. A Drop in Housing Investment

A decline in housing investment is the most direct way the housing slowdown could impact the economy. This includes everything from construction to improvements and renovations.

Residential real estate investment activity started to fall dramatically in 2022 and has stagnated in recent years. In the first quarter of this year, private residential fixed investment was $794.4 billion, down 15.6% from its peak in 2021. Pantheon Macro expects this to subtract around 0.2 percentage points from annualized GDP growth in the second and third quarters of 2024.

3. Impacts on the Labor Market

The unemployment rate remains near a record-low, but hiring has slowed among employers. A frozen housing market means less construction and fewer construction jobs. With around 8 million construction workers in the US, this sector plays a vital role in the economy.

Construction employment grew 1.5% year-over-year in May, nearly half the rate of growth at the same time last year. Citi's Andrew Hollenhorst says he sees signs that the labor market is growing fragile, pointing to rising layoffs and a low hiring rate among employers.

"If you don't have a job or you're worried about not having a job, that's really going to cause you to pull back on spending," he said. "That's what really drives a downturn."

While Pantheon's Allen and Citi's Hollenhorst don't think a recession is likely, they say the economy looks more on track for a slowdown and weaker GDP growth than it's seen in recent years. Still, the risk remains on the radar.

💥 Why It Matters

The housing market is more than just a sector—it's a barometer for the entire economy. When home prices fall, consumer confidence wanes. When construction slows, jobs disappear. When spending drops, the whole system feels the impact.

Economists are watching these signals closely because they know that a housing slump can quickly turn into a broader economic crisis. While a full-blown recession may not be imminent, the signs are there—and they're worth paying attention to.

🔗 How It Connects

The housing market has long been a key driver of economic growth. When it's strong, it fuels construction, creates jobs, and boosts consumer spending. When it's weak, it can trigger a chain reaction that affects everything from retail sales to manufacturing. Understanding these connections helps us see why economists are so concerned about the current state of the market.