In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi discuss the impact of recent market volatility and tariff uncertainty, analyzing data to determine if housing has slipped into a recession.
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“The real issue is that existing homeowners who, by the way, largely become buyers, are still not selling and slightly lower rates isn’t really going to change that. But time and aging will.” – Mark Fleming, chief economist at First American
Odeta Kushi - Hello and welcome to episode 114 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey Mark, I don't know if you've heard or anything, but home sales, particularly existing-home sales, have been pretty weak.
Mark Fleming - You don't say. That's been, I think, a theme for the last couple of years. We've been saying this point for the last few years.
Odeta Kushi - Yeah, I mean, ever since interest rates spiked in 2022, right after the Fed decided to increase interest rates to slow down inflation, existing-home sales have not been able to break through five million annualized sales.
Mark Fleming - And so would you say we're in a housing recession because of it?
Odeta Kushi -That's kind of a loaded question, but in my official capacity as a founding member of the HCDC, Housing Cycle Dating Committee, I am authorized to answer this question.
Mark Fleming - It is indeed. You know, I almost forgot about the HCDC, our version of the group that calls economic recessions like the NBER's BCDC, Business Cycle Dating Committee.
Odeta Kushi - That's right, our housing recession equivalent of that NBER BCDC methodology is based on the following indicators. Stay with me here, because there's quite a few of them. It's a pretty long list, but that's the point. It's meant to be comprehensive. So, the first one is just average hourly earnings of non-supervisory construction workers. Then we have the total number of employees in residential building construction, total number of employees in real estate, rental, and leasing.
Mark Fleming - It's a long list, listeners.
Odeta Kushi - Right. The number of single-family housing starts, private residential fixed investment, personal consumption expenditures on housing and utilities, existing-home sales, and last but not least, our Real House Price Index, which is a measure of affordability. So, the way that we capture a housing recession is that we say that if the moving average of the monthly growth rate of four of the eight of these indicators is negative for at least three consecutive months, then a housing recession has begun. That is our sort of rule of thumb here, but based in data.
Mark Fleming - Phew, that's a long list. Call me Thunderstruck, Odeta, H-C-D-C, A-C-D-C. I know you get it, right?
Odeta Kushi - Yeah, no, I get it. I get it all right.
Mark Fleming - And the eye roll to go with it. You know, I think we may have overused the AC/DC references because I think we did that also in our original episode where we introduced the housing recession indicator.
Odeta Kushi - Yeah, but you know, that was way back in episode 59 in March of 2023. So, we've lived a lifetime since then. I think so. That's right.
Mark Fleming - We can recycle at this point. So, with over two more years of housing data to work with since the first introduction, back to this housing recession talk. Can you walk us through what's happened to the housing recession measure over time?
Odeta Kushi - So, according to our housing recession indicator, the average length of a housing recession is 13 months. So that's a pretty long time. But there are a couple of notably longer exceptions that are pulling up that average. For example, the Global Financial Crisis (GFC) housing recession that was 40 months. The GFC was a double-dip recession with a 40-month long recession from early 2006 to mid 2009 as sales and construction slowed dramatically. Then there was a brief pause, according to our measure. That pause lasted about five months. And then we dipped back into a recession for another 10 months in late 2009 through most of 2010 caused primarily by, you guessed it, another slowdown in construction and slower existing-home sales.
Mark Fleming - I am unfortunately old enough in my career to remember those days and they were pretty tough, the Global Financial Crisis in the housing market. But, by comparison, the most recent housing recession from May to July of 2024, very short, due to slower existing-home sales, declining affordability, a slowdown in housing starts and real estate jobs.
Odeta Kushi - But you know, so far in 2025, our measure is not telling us that we are in a housing recession.
Mark Fleming - Well, that's good, of course, but it doesn't mean that the housing market isn't struggling. You're not getting worse, but it's not necessarily getting demonstrably better, especially as we mentioned at the top of the episode, when you look at existing-home sales.
Odeta Kushi - Right. Consider that in February, existing-home sales were at 4.26 million on a seasonally adjusted annualized basis. This is the same level of sales as during the aftermath of the Global Financial Crisis and the late 1990s. However…
Mark Fleming - You sure there's not a third decimal to it?
Odeta Kushi - Comparing today's home sales to those in the past without considering the growth in the overall market size is like comparing today's apples with yesterday's oranges.
Mark Fleming - Okay, I see where this analogy might be going here. That's true. We have to consider the size of the pie, although I'm thinking orange pie. Okay. Well, maybe it's a good thing. We'll go with apple pie. It makes much more sense. In our case, the pie is the number of households. So, the total number of US households represents the demand for homes and is pretty much constantly growing over time.
Odeta Kushi - My mind went to the same place. I'm like, that sounds disgusting, but maybe someone likes it. So, an annual pace of 4 million existing-home sales today is relatively speaking much weaker than the same number 15 years ago, given the increase in the number of households. Today there are 132 million households compared to 112 million households 15 years ago. That's an 18% increase in demand. So, 4 million home sales now are a smaller slice of a much bigger apple pie.
Mark Fleming - So, sticking with the fruit analogy, if we look at existing-home sales as a percentage slice of the pie over time, sales are down to the same levels as the early 1990s, just above 3% and well below the long run average of 4.1%.
Odeta Kushi - Yep. That's a pretty skinny slice, not my kind of slice of pie. So that means if home sales today were tracking at the long-run average percentage of total households, the pace would be about 5.4 million sales as opposed to that 4.26 million I mentioned earlier. So where did more than a million sales go?
Mark Fleming - We like big slices. I know that's the really big question. Sales activity is below average because existing homeowners aren't selling for two main reasons. They're either locked into their current mortgage rates, older and choosing to stay in their homes, or in most cases, both of those things.
Odeta Kushi - So, on that first point, we know that as of 2024, there were 65 million Baby Boomers accounting for 20% of the US population and 36% of total homeowner households. According to a Freddie Mac survey in 2021, nearly 70% of Baby Boomer households felt confident that they would remain in their homes, with 68% of respondents indicating they either plan to age in place, or don't have plans to move again. And, according to Freddie Mac's 2019 report, seniors aging in place, otherwise not behaving as previous older generations did and aging out of their homes, that's holding back about 1.6 million homes off the market.
Mark Fleming - Okay, so there's one source of the missing slice of this pie. And the other one, of course, is the rate lock-in effect. The latest National Mortgage Database data from the fourth quarter of last year reveals that 82% of mortgaged homes have a rate below 6%. That's a big one. But that lock-in effect has actually eased substantially. If you consider the second quarter of 2022, remember when we were just sort of going into that cycle of raising rates. Nearly 93% of mortgaged homes had a rate below 6%. So, whether 93% or 86%, the lock-in effect remains substantial.
Odeta Kushi - Oof. True, not to mention that the other piece here is affordability for potential first-time home buyers. That remains a significant challenge to entering the market.
Mark Fleming - Absolutely, that's a major hurdle as well. But I think the real issue is that existing homeowners, who by the way, largely become buyers, that those existing homeowners are still not selling and slightly lower rates aren't really going to change that. But time and aging will.
Odeta Kushi - Mm-hmm. As it already has, right? I mean that lock-in effect has eased and with it, inventory has climbed higher.
Mark Fleming - Inventory and life happens. Sometimes you just need to move, be it for a career change or a lifestyle change. Moreover, a lot of these homeowners are sitting on substantial home equity so they can offset higher interest rates by bringing down a higher down payment to the closing table.
Odeta Kushi - That's a great point. We also know that home sales are not just made up of existing homes or used homes, I guess, as you like to call them, but also new homes.
Mark Fleming - Used homes, right? We're the only country that calls them existing.
Odeta Kushi - Yes, well, if we have new homes, makes sense to call them used homes or old homes, I guess. But, according to our latest analysis, existing homes made up 86% of total home sales in February, while new-home sales made up about 14%. So, the biggest chunk does come from existing homes, but you can't leave out that new home component as well.
Mark Fleming - Exactly. That's right. So, using a similar analysis of apple pie, or apples to oranges, we find that the relative sales of new homes has also declined. The number of new-home sales as a percentage of the pie over time has fallen to the same levels as again, the early 1990s, about half a percent and well below the long-run average for new homes of 0.7%.
Odeta Kushi - And, if new home sales were tracking at that long-run average percentage of total households, the pace would be almost 950,000. But the reasons for this decline are a little bit different from the existing home market.
Mark Fleming - That's right. Builders, of course, face less competition due to the chronic housing shortage made worse by the sellers’ strike. They are not living in those homes that they're building, but their construction costs have increased significantly compared to pre-pandemic residential construction costs. They're up more than 40%. Financing costs are also higher for builders. So, it's getting more expensive to build.
Odeta Kushi - Not to mention that builders have had to navigate regulatory restrictions, a chronic skilled labor shortage since the Global Financial Crisis, and lot shortages, making it difficult to scale up construction to meet growing demand, let alone reduce the overall housing supply shortage that we've been accruing over time.
Mark Fleming - That's right, all unfortunately true. So, when we put this all together, we find that in February, total combined home sales were 5 million seasonally adjusted annualized sales, or 3.7% of the total household pie, which is 1.1 percentage points below the historic pre-pandemic average for total sales of 4.8%.
Odeta Kushi - And, if total home sales were tracking at the long-run average percentage of total households, the pace would be closer to 6 million. So, we're at 5 million It should be closer to 6 million, given that historical comparison. That's a lot of missing sales. And we feel it, right? Everyone in the housing industry can feel that. Other than the brief dip in 2010 due to the expiration of the first-time home buyer tax credit, this level of sales activity as a share of total households is similar to the early ‘80s.
Mark Fleming - That's a lot of missing sales. Okay, Odeta, I cannot let this go. Of course, you mentioned the ‘80s. I love it when a plan comes together.
Odeta Kushi - Did you just call the A-Team?
Mark Fleming - I did indeed. And you know what? I'm impressed that you picked up on that. Now that was must-see TV. Back-to-back decadal references here. I'm guessing you know this latter one as well Odeta or maybe more so than the A-Team.
Odeta Kushi - First of all, I only know the A-Team because of you. Because we've been in the office together long enough for you to reference, “love it when a plan comes together” and then tell me where it's from every time. But I'm also of the Friends generation. So, of course I know what must-see TV is. But, you know, before we close the episode, I want to mention that this analysis can be repeated for inventory as well as sales. And, in fact, it should be what we call our household adjusted inventory measure, inventory turnover.
Mark Fleming - Hahaha, every time. There you go.
Odeta Kushi - In February, total new and existing inventory turnover was 1.4%, or 140 in every 10,000 homes were for sale. Historically, it would be more like 250 in every 10,000 homes were for sale.
Mark Fleming - So, still well under-supplied in terms of inventory from a historical perspective.
Odeta Kushi - That's right, but it's an improvement from where we started 2024 at 123 in every 10,000 homes were for sale. That increase in both new- and existing-home inventory should allow for more sales to happen.
Mark Fleming - That's right, you can't buy what's not for sale, but luckily home inventory is modestly rising and, therefore, sales activity should slowly follow.
Odeta Kushi - But all of the things we mentioned over the episode will continue to hold back market activity from its potential. The lock-in effect, affordability constraints, aging in place and, for the builders, rising costs, supply-side constraints, and higher financing costs.
Mark Fleming - Womp womp, Debbie downturn again!
Odeta Kushi - You know what? I think I'm more like a Rebecca Realist or something.
Mark Fleming - Yeah, no, no, no. Doesn't roll off the tongue the same way. No.
Odeta Kushi - Okay, actually, it really doesn't. Okay, well, when we're trying to assess the health of the housing market, this episode should hopefully show you that it's important to account for the size of the pie. I mean, households. And that's it for today's episode. I think we're going to go grab some apple pie, probably. Thank you for joining us.
Mark Fleming - That's right. Should we try and make an orange pie? Is there such a thing? I wouldn't imagine. OK. I do like apple pie, so we're good to go. Yeah.
Odeta Kushi - You can take that task on yourself, but I'm going to skip the orange pie. That's where we're going. Thank you for joining us on this episode of The REconomy Podcast. If you have an economics-related question you'd like us to feature in the future, you can email us at economics@firstam.com. And, as always, if you can't wait for the next episode, you can follow us on X. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.
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