Housing Market Slump Fuels Recession Fears Ahead of Key August Data

The U.S. housing market is flashing critical warning signs for a potential recession, according to Moody’s Analytics chief economist Mark Zandi. In recent social media posts, Zandi highlighted that Moody’s leading economic indicator, powered by machine learning, now places the probability of a recession within the next 12 months at 48%. While just under 50%, Zandi noted that such a high probability has historically preceded an economic downturn.

A primary driver of this concern is the housing sector, specifically building permits. Zandi identifies building permits as the ‘most critical economic variable for predicting recessions.’ After a period where builders sustained sales with incentives, rising inventories of unsold homes are now forcing a pullback, causing permits to slump to their lowest levels since the pandemic shutdowns. The Census Bureau’s July report showed residential building permits at a seasonally adjusted annual rate of 1.35 million, down 2.8% from the previous month and 5.7% year-over-year.

All eyes are now on the upcoming August permit data, expected this Wednesday, which Zandi predicts will provide further impetus for the Federal Reserve to consider a rate cut. Federal Reserve policymakers have already voiced concerns about the housing market’s weakening demand, increasing supply, and falling prices, with minutes from their July meeting flagging it as a potential risk to employment alongside AI technology.

Beyond permits, residential investment also paints a grim picture, with a 4.7% tumble in the second quarter, accelerating from the first quarter’s 1.3% decline. This data reinforces the housing market’s traditional role as a key leading indicator of broader economic health, suggesting turbulent times ahead.

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