What If: US Housing Slump and Deeper Recession Risk

What if the US housing market slumps on high prices and spiking interest rates: will this cause a deep recession?

The Conference Board already projects that the Fed’s aggressive tightening cycle will push the US into a brief recession starting in 4Q 2022 (see The Conference Board Economic Forecast for the US Economy). However, this forecast assumes only a mild reduction in housing activity, including a dip in housing starts and falling prices, given a more robust mortgage system and wealthier homebuyers. However, a dive in confidence – consumer, business, and investor – in reaction to declines in homes prices and housing activity could certainly plunge the US into a deeper recession than anticipated.

We model a complete undoing of the gains in home price values, sales, and construction since the start of the pandemic. The scenario includes a reduction in housing starts from 1.7 million currently to around 470,000 the low reached after the 2005-07 housing bust, a 30-percentage point dive in home prices, which is roughly equivalent to peak-to-trough correction after the last housing bubble burst, a 30 percentage point fall in equity market valuations (to simulate a hit to confidence) that would return the S&P 500 to the level that prevailed in 2019, and no easing from the Fed in response. (See StraightTalk® The Many Roads to Recession.)

Layering on Fed rate hikes and a housing slump would make the impending recession worse. A sharp decline in housing activity accompanied by a collapse in confidence and financial conditions might cut from 0.3 to 0.5 percentage point from our existing GDP growth forecasts of 2.0 and 0.6 percent year-over-year growth in 2022 and 2023 respectively.