Economic recession or not, the housing market recession is here

Earlier in 2022, an economic recession seemed inevitable by the end of the year. Two consecutive quarters of negative Gross Domestic Product (GDP) - usually the main indicator of a US recession - along with the known bear market in the stock market, made an almost official recession declaration.

However, with the news of positive GDP growth in the third quarter (Q3) of 2022, as well as the continued recovery in employment, fears of an economic recession have eased somewhat. This slight rebound in GDP was attributed to the increase in consumer spending - hello inflation - which was enough to offset a 7.4% decline in the housing sector according to the Bureau of Economic Analysis.

But to fuel this amount of consumer spending, households save less. The national personal savings rate is at its lowest level in a decade, at just 3.5% in August 2022. The current savings rate has fallen out of necessity as households struggle to make ends meet under pressure from above consumer price inflation since the 1980s.

As a senior Wells Fargo economist recently put it in The New York Times, as long as spending continues to outpace income, consumers are on "borrowed time."

Although an economic recession has not yet arrived in 2022, it is only a matter of time; for housing, the recession is already here.

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Like water in the cracks of a foundation, the recession gradually seeped into the housing market, causing damage such as:

California home prices have completely reversed course from their May 2022 peak, ranging from 4% below San Diego's lower tier peak to a staggering 10% loss in San Francisco's upper tier in August 2022. This rapid decline happened in just three months - and prices are still falling.

Many media have attributed the fall in house prices to the Federal Reserve (the Fed) and their work to calm inflation by raising their benchmark interest rate.

Although the 2022 interest rate hike certainly plays a role, as it reduced buyer's purchasing power instantly, the house price correction that will take place in 2022 was in the cards, regardless of recent interest rate jumps.

Years of home price increases far outpacing the pace of income has built an unsustainable market, with investor buyers increasingly taking the place of traditional owner-occupier buyers. In other words, to borrow language from the broader economy, the housing market has long operated on borrowed time.

Therefore, anyone who thinks this is a short-term setback for home values, likely to rebound as soon as interest rates ease, is dreaming.

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Buyers - and real estate agents - have become accustomed to experiencing housing as a get-rich-quick scheme. It's time for everyone to pivot and see housing as shelter or long-term investment first.

Cautious homebuyers will wait for prices to bottom out before returning to the market, which is likely to happen here in California around 2025. Short-minded fins will sink deep submarine in the coming years as prices continue to decline.

Real estate professionals who wish to continue living even as traditional market players take a step back from housing will learn to innovate, taking other sources of income. Ready to take advantage of existing contacts in careers adjacent to real estate, these agents and brokers will survive and succeed even if the housing market continues to stumble in the years to come.

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