It has been widely reported that the housing market is in a recession. Though prices remain high, sales of existing homes were down 30% as of August 2022, as were sales of new homes. Housing declines are historically a harbinger for recessions, but does this mean that a recession is imminent?
Figure 1: New Home Sales, Real Home Price Growth and Recessions, 1963-2010
Though prices are typically the most widely-discussed housing statistic, they tell us a partial, and often misleading, story about the overall state of the housing market. This is because housing typically follows a volume cycle, not a price cycle.
Figure 1 shows the growth in new home sales and real home prices since 1963. Recessions are shaded. The more extreme movements in the red line make it clear that sales have a more volatile cycle than prices. Prices exhibit drops during recessions, but they are minor. Even during the Great Recession — the biggest home price crash in recorded history — the price decline was dwarfed by the decline in sales volumes. The deepest year-over-year decline in prices was 14%, but home sales dropped 40%.
Figure 2: Year-Over-Year Changes in S&P CoreLogic Case-Shiller Index, 1964-Present
Prices exhibit a clear downward stickiness. Figure 2 emphasizes this point, showing year-over-year changes in the CoreLogic S&P Case-Shiller Index. The only notable decrease in nominal prices that occurred was during the Great Recession.
Aside from that, it has not been a matter of if prices are increasing but rather by how much. This is natural. During recessions, there is less demand, but sellers are forward-looking. Rather than sell their homes now, many would rather wait out downturns until demand increases and they don’t have to sell at a discount. So instead of the same number of sales occurring at a lower price, fewer sales occur at similar prices. Certainly, there are always sellers who cannot delay and will have to take a discount, but in the past, those cases have been few. The exception is the Great Recession when house prices went on a half-decade-long slide. What was different in this situation? Borrowers were unable to continue to pay their mortgages, which wasn’t the case in previous recessions.
Another clear feature in Figure 1 is that housing declines are harbingers for recessions. This has been widely documented in research. Because of the resistance of prices to drop, however, the recessions have only been preceded by downturns in sales, rather than prices. This is particularly notable with new home sales. Home sale declines have preceded 9 of the last 12 recessions. Whether or not housing declines cause recessions is a matter of debate, and with the exception of 2007, there are other plausible explanations for the impetus behind a recession. It is easier to see housing as a component of the business cycle that expresses itself before the others, but they are all still part of the same cycle.
Figure 3: 12-Month Rolling Average of New Home Sales Since 2015
This brings us back to the current “housing recession.” Figure 3 focuses on the 12-month rolling average of new home sales since 2015. The recent sharp correction is clear. Similar events in the past have been followed by recessions.
Does that mean a recession is on the way now? Not necessarily. Recently, housing has been losing its status as a reliable predictor of recessions. The connection has been weaker statistically. If there is a recession next year, housing will be at 2 for 4 since 2000. If there isn’t a recession, housing will be 1 for 4, with the only recession it predicted being one where it was the cause of the recession. One could call the COVID and dot-com recessions different, but the world has changed a great deal over the past 100 years. This suggests that present-day recessions and housing markets are simply of a different nature than the ones of the last century, and the prior connection is fading.
 Edward E. Leamer, 2007. “Housing is the business cycle,” Proceedings – Economic Policy Symposium – Jackson Hole, Federal Reserve Bank of Kansas City, pages 149-233.
 New home sales are shown because information on existing home sales is less reliable for pre-1990s data.
 Case in point, car sales are also a reliable predictor of recessions. Yet no one points to cars as the cause of any recession.
 Green, R. K. (2022). Is housing still the business cycle? Perhaps not. In Handbook of real estate and macroeconomics (pp. 269-283). Edward Elgar Publishing.