U.S. housing buying conditions collapse after 4 decades; Is recession next?

The United States housing market continues to show potential signs of an impending economic downturn amidst growing uncertainty.

Recent indicators indicate a dramatic decline in housing buying conditions, reaching levels not seen in over four decades.

In particular, data from the research investment platform, Game of Trades, shared in an X post on 5 July 2024, revealed that current conditions mirror economic downturns observed in 1974 and 1981, which preceded severe recessions.

“Buying conditions in the US housing market has collapsed. Reaching levels only seen 2 times since 1960:1974, 1981. Both instances ended in a recession. The housing market is a key leading indicator of the business cycle,” the platform noted. 

Game of Trades’ data illustrated buying conditions for housing surveyed from 1960 to May 2024. The metric, adjusted by +100, reflects the difference between consumers reporting favorable versus unfavorable conditions.

This recent decline parallels the sharp drops in 1974 and 1981, periods marked by significant economic turmoil and subsequent recessions. Such downturns historically coincide with prolonged economic contractions.

Changing consumer confidence

The substantial and rapid decrease in buying conditions suggests a notable loss of consumer confidence in the housing market, often a leading indicator for broader economic trends.

Game of Trades also noted the housing market’s historical sensitivity to interest rate changes. The current collapse may be linked to prevailing interest rate hikes aimed at curbing inflation. Higher interest rates typically lead to increased mortgage costs, reducing affordability and thus dampening demand.

At the moment, attention is focused on the Federal Reserve regarding its next monetary policy decision, an element likely to alter the economy’s direction. This comes as more analysts maintain that the U.S. economy might enter a recession in the second half of 2022.

Given the housing market’s pivotal role in the business cycle, its volatility reflects widespread uncertainty and diminished consumer purchasing power.

It’s noteworthy that housing conditions are not the only indicator signaling trouble for the U.S. economy. 
As reported by Finbold, home valuations have reached levels last seen just before the previous financial crisis in 2008, sparking concerns about an impending recession. In addition to the housing market, other recession indicators have also stemmed from rising unemployment rates.