The housing market has long served as a precursor to economic downturns, and recent analysis from Moody’s Analytics has brought this premise back into focus. Mark Zandi, the chief economist for Moody’s, highlighted a significant data point through social media posts this past Sunday. He revealed that Moody’s leading economic indicator, which employs machine learning, suggests a 48% likelihood of a recession within the next year.
Although this figure remains below the 50% threshold, Zandi emphasized that such elevated odds have rarely occurred without the economy eventually entering a recession.
A vital aspect of Moody’s analysis is the housing market, particularly building permits, which the algorithm identifies as the most telling economic variable for recession predictions. Zandi noted that while building permits had been holding steady—bolstered by builders offering incentives like interest rate buydowns—current trends indicate a shift. With inventories of unsold homes increasing, builders are reacting by scaling back operations, leading to a notable slump in new building permits. The latest data shows these permits plummeting to levels not seen since the pandemic shutdowns.
According to the Census Bureau, the seasonally adjusted annual rate for residential building permits reached 1.35 million in July, reflecting a 2.8% decrease from the previous month and a 5.7% decline compared to the same month last year.
Zandi raised alarms about the housing market in July, categorizing the situation as a “red flare.” He pointed out that home sales, homebuilding, and prices are all under pressure due to high mortgage rates. While the 30-year fixed mortgage rate has somewhat eased from nearly 7% down to 6.3%, uncertainty remains regarding whether this drop is sufficient to stimulate builder activity.
Looking ahead, Zandi stressed the importance of the upcoming August permit data, expected to be released on Wednesday, suggesting it may provide further justification for the Federal Reserve to announce an interest rate cut later that day.
The Federal Reserve itself has begun to express concerns about the housing market. Minutes from the central bank’s July meeting indicated unease over weak housing demand, rising supply, and decreasing home prices. Officials identified housing as a potential risk to employment, highlighting a range of factors including elevated financial conditions, a significant downturn in the housing sector, and the impact of artificial intelligence on jobs.
In addition to permits, other indicators of the housing market are also disconcerting. The late economist Ed Leamer famously suggested that residential investment serves as a leading indicator for economic downturns. Recent data corroborates this view, with residential investment dropping 4.7% in the second quarter, worsening from a 1.3% decline in the previous quarter.
The signs emerging from the housing market and broader economic indicators suggest that policymakers and stakeholders will need to remain vigilant in assessing the potential risks ahead.
