Housing entered a slowdown this spring, intensified by the June spike in interest rates. Predicting the future is seldom rewarded, but these slowdowns—recessions, if it comes to that—have strong historical patterns.
Housing is first in, first out
When the Fed fights inflation, housing slows first because we are so sensitive to interest rates. It sounds odd given that today we’re not in a recession, but the cycle of rising mortgage rates may have already peaked in June. In one bad week, rates touched 6.50 percent but are now closer to 5.50 percent. That’s still too high—we need 4.50 percent— but when the overall national economy slows, then mortgage rates will fall more, long before we hit the bottom of the slowdown.
Unemployment is last
Past slowdowns hit housing first, then consumer spending and businesses, then layoffs. All Fed theories and experience hold that to defeat inflation, unemployment must rise. In every recession back to the 1950s, unemployment peaked at the end of recession. By then the Fed had been cutting rates for a year or more, putting housing in strong recovery, with jobs taking years to rebound.
We are protected
Housing locally is protected by our scarcity of land, migration to Colorado, and strong IT economy. For every buyer lost to higher rates, two will be back, including those who didn’t have the cash to play in the crazy above-asking COVID auctions. Housing spirals down when distressed sales feed on themselves to trigger overbuilding, builder liquidation, and financially weak households shoehorned into bad loans. Today we have none of that—today’s homeowners are the strongest group ever.
We could beat inflation quickly or slowly. We will recover, but guessing how and when is hopeless. The best advice the Fed chair gave to his colleagues at the Fed: “We will be nimble.”
Which goes for all of us!