If you’ve been paying attention to the U.S. housing market, you’ve likely seen words like “correction” and “recession” crop up more and more.
Earlier this week, National Association of Home Builders CEO Jerry Howard warned on Fox Business’ “Varney & Co.” of a “tough time” ahead for home builders as data continues to show the national housing market slowing down.
And as home builder confidence drops — hitting its lowest reading since May of 2022, according to the NAHB/Wells Fargo Housing Market Index released Monday — Howard said the outlook looks grim.
“For the last seven straight months it has been going down and this is a huge drop — and I think all it says is, ‘Somebody do something or we’re going to go into a recession,’” Howard said on “Varney & Co.”
Then, on Wednesday, Fortune declared the housing market is entering into a “recession,” or is “contracting” as homebuilding cuts back and existing home inventory ticks up as higher mortgage rates strangle demand.
So what does today’s housing “recession” look like? No, we’re not in “Great Recession” territory like after the 2006 housing bubble popped and banks’ risky lending practices collapsed, sending the world economy tumbling.
Rather, in today’s context — after more than two years of what seemed like insatiable housing demand after the COVID-19 pandemic sent the market into a frenzy, especially in the West — “recession” looks a lot more like a “correction,” which could be good news for homebuyers if they’re hoping for price growth to at least level off or even perhaps decline.
The latest gauge of the U.S. housing market
“Peak euphoria is behind us. We are giving back some of the euphoria (home) pricing that was rolling over every housing market,” Rick Palacios Jr., head of research at John Burns Real Estate Consulting, which consults for both builders and investors, told Fortune.
Nationwide, even though we’re halfway through peak summer shopping season, this year’s home sales have dipped compared to 2021 levels. June posted the most home sales of any month so far this year, topping May by 4.7%, but they still fell almost 18% short of June 2021 numbers, according to RE/MAX’s June National Housing Report released this week.
By the numbers: National inventory is growing. It ballooned for a third consecutive month in June — up a “whopping” 34.1% over May and 27.5% compared to last year, the RE/MAX report states.
Meanwhile, price growth is slowing — but it hasn’t halted. While the U.S.’s median sales price of $428,000 is up 11% year over year, that’s up by only 0.6% compared to May.
What they’re saying: “The market is moving toward greater balance, especially with inventory gains and the slowing of price appreciation. The past few years have been one of the most competitive times ever for buyers — and we’re finally seeing conditions ease up,” Nick Bailey, president and CEO of RE/MAX said in a prepared statement.
Bailey said that’s partly due to higher mortgage rates amid the Federal Reserve’s battle with inflation, “but even more significant is the increase in listings after several years of instant sales and low inventory.”
For housing markets that glowed particularly red-hot during the pandemic as Americans re-evaluated their lives and looked for more space at lower price points, we’re really seeing the impact, especially the West.
States like Idaho, Arizona, Nevada and, yes, Utah are ground zero for these shifting housing market dynamics — and they’re already showing signs of what this housing “recession,” “correction” or “contraction” could mean.
‘Bubbly’ markets in the West: Boise, Idaho
The West is full of what Fortune has coined “bubbly” regional markets, or areas that saw demand shoot sky high after COVID-19 ignited a frenzy for housing that was more spacious and more affordable than big-city areas like San Francisco, Seattle or New York.
The big beneficiary from the work-from-home rush on housing was “undoubtedly Boise,” Fortune wrote, where home prices shot up 53%. “You could even call it the poster child of the pandemic housing boom.”
Utah wasn’t far behind, and housing prices were already quickly rising as the fast-growing state has been grappling with a yearslong housing shortage even before the pandemic.
But now that work-from-home house buying “honeymoon,” as Fortune put it, is over. Higher mortgage rates have indeed tempered demand, especially in Boise, where home sales have plummeted 28% year over year and inventory has surged up 161% this year. Zillow estimates also show Boise’s median home sale price actually dipped 3.5% in June.
What now? “That downward slide in Boise has only just begun,” Fortune reported, according to Palacios, whose firm projects home prices will turn negative in Boise year over year in December. “In order for that to happen, Boise would not only have to lose all of its 2022 gains — which is already starting to happen — but also fall under its December 2021 price.”
“You could make a strong case that in a lot of housing markets the last 10% of home price appreciation was purely aspirational and irrational, and that’ll come off the top really fast,” Palacios told Fortune. “That’s exactly what we’re all seeing right now.”
Nevada: Las Vegas’ housing market is also getting hit hard. Its housing market topped RE/MAX’s June list for markets with the biggest year-over-year increase to months’ supply of homes — up over 208%.
Utah: The Salt Lake City market is right behind Las Vegas as the No. 2 market with the biggest bump to months’ supply of homes. Inventory here went up by over 196%, and yet closing transactions dropped by over 27%, according to RE/MAX.
Arizona: In third place? Phoenix, which saw a 187% boost to its months’ supply of homes. In fourth place, Bozeman, Montana, saw a 185.5% increase to inventory.
Where is the market headed?
Moody’s Analytics has predicted U.S. home prices will level out by this time next year, while “overvalued” housing markets like Boise could see price declines of up to 10% over the next year. If the economy enters into a recession, Moody’s Analytics predicts U.S. housing prices could actually decline by 5% and markets like Boise could see declines upwards of 20%, Fortune has reported.
John Burns Real Estate Consulting has a more cynical projection, predicting U.S. home prices will fall in 2023 and in 2024, with the biggest price drops in Boise; Phoenix; Nashville Tennessee; West Palm Beach, Florida; Las Vegas; Port St. Lucie, Florid; Riverside, California; Fort Myers, Florida; Austin; and Visalia, California, Fortune reported.
Is Utah overvalued? While Moody’s Analytics doesn’t peg Utah regional markets as overvalued as Boise, they’re still on their radar. Ogden’s regional market is over 50% overvalued, according to Fortune’s analysis of Moody’s data, the Salt Lake County market is 32% overvalued and Provo-Orem is 20% overvalued.
While sales are slowing here in Utah, too, the state is still grappling with a housing shortage that has housing experts here saying it would be hard to fathom dramatic price declines — but as the market slows and sales have fallen, it’s possible we may see prices at least level off or at least slightly dip.
A big share of Utah home sellers are already slashing their prices as they adjust to buyers’ breaking points and sales continue to fall. June marked the 13th consecutive month Salt Lake County sales have fallen year over year. If the market hits 18 months, then actual price declines seem more likely.