ATLANTA — The housing market is cooling quickly in Colorado and across the country under the weight of rapidly rising interest rates, a reversal that will worsen any economic slowdown in the months ahead, several real estate experts are warning.
“Our take is that the economy is in recession,” said Robert Dietz, chief economist with the National Association of Homebuilders, during a presentation at the National Association of Real Estate Editors in Atlanta on Tuesday.
The U.S. economy shrank in the first half of the year and should grow in the third quarter, Dietz said. But that will be a false rebound, followed by three more quarters of year-over-year declines that remove any doubts a recession is underway.
Housing tends to lead the larger economy, slowing before a recession starts and rebounding before it ends, Dietz said. He doesn’t see a housing rebound until 2024, once the Federal Reserve eases monetary policy.
Rates on 30-year mortgages are now above 7% and demand for loans is falling precipitously, according to the Mortgage Bankers Association. Zillow estimates that the typical U.S. homebuyer faces a monthly payment 75% higher than was the case a year ago on the same house.
“We are seeing a lot of buyers hit the wall of affordability,” said Nicole Bachaud, a senior economist at Zillow.
In metro Denver, home prices would need to fall 29% to return affordability to levels seen before the pandemic, according to Zillow. While such a large decline is unlikely, homeowners should prepare mentally for lower valuations.
“We are in for price corrections in a lot of markets,” said Chris Birk, vice president of mortgage insight at Veterans United Home Loans.
Declines will depend on how much home prices have risen the past two years, as well as the severity of any economic downturn. Birk predicts that corrections of 10% to 15% from the peak prices aren’t out of the question, and closer to 20% if there is a full-blown recession.
The construction sector shouldn’t suffer the devastation seen during the Great Recession when builders kept adding inventory into a glutted market. For one, single-family housing starts are expected to decline 14% this year, a sign that builders are responding to reduced demand by cutting supply for the first time since 2011.
Remodeling demand remains strong as well, driven by homebuyers who are spending more time working at home and who are reluctant to move given how low an interest rate they currently have on their home loans.
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Consumers who can’t afford to purchase a home are increasingly renting single-family homes, and more of them are doing so in “build-to-rent” communities specifically built as rental communities.
About 5% to 6% of new homes are being built for rental communities, or what some call horizontal multi-family, and investors are buying a similar share to rent out. That 10% or so share contrasts with a 3% share seen historically, Dietz said.
Richard Ross, CEO of Quinn Residences, an Atlanta-based developer of build-to-rent communities, said prices and rates have run up so much that a typical tenant is paying about 30% less a month in their communities than if they had bought a comparable home.
Dietz also notes that big builders have been preparing for the last two to three years to shift to build-to-rent, which allows them to stay more active than might otherwise be the case. To the degree that pivot allows them to survive any downturn, the better positioned they will be to gear up when demand returns in what remains an undersupplied housing market.
