US macro update: Housing market sees a sharp reversal of fortune

US macro update: Housing market sees a sharp reversal of fortune

The US housing market is rapidly transitioning from robustness (if not exuberance) last year to softness this year.

The US housing market went through a mini-boom in 2020-21 on account of demand for additional space during the period of Covid restrictions coupled with easy money from the Federal Reserve. This was in spite of sharply-rising costs and acute bottlenecks in workers and materials availability.

This period has now ended: housing activity is falling as the Fed gets aggressive with rate hikes to combat high inflation, while the latest surge in prices has led to buyer caution.

Recent housing-related surveys, in particular homebuilders’ surveys, suggest more weakness is likely in the coming months.

US housing is not as financialised and globally interlinked as it was during the subprime crisis of 2008 and the global financial risks are perhaps not as dire as then.

A shortage of housing stock provides a cushion for prices to some degree, but this could disappear rapidly should housing slow more profoundly.A slowdown in the US housing sector, which represents 5% of GDP (but more when counting for spillovers) is one of the forces along with an inventory reversal and plunging capex (business investment) that may tip the US economy into mild recession, in our view.

A mild recession (official, as per the National Bureau of Economic Research) from Q1 2023 is still our main scenario with our 2023 GDP forecast at -0.4%. Risk is that recession could come earlier than Q1 2023, and could be deeper especially if private consumption is affected, for instance by tighter access to consumer credit.

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