| America has entered into a housing recession.
That's the consensus from a variety of real estate experts.
Sales of new homes fell 12.6% in July, following a drop in May, as the housing sector continues to soften from the twin shocks of rising mortgage rates and higher prices, the Census Bureau reported on Tuesday.
The decline to an annual rate of 511,000 from the revised June number of 585,000 confirms housing is now in a "recession," as the National Association of Home Builders recently reported, putting a damper on a sector of the economy that led the way during the pandemic as people hunkered down.
"We're witnessing a housing recession in terms of declining home sales and home building," Lawrence Yun, chief economist for the National Association of Realtors explained to CNBC reporter Sarah O'Brien.
"It's not a recession in home prices," Yun added. "Inventory remains tight and prices continue to rise nationally with nearly 40% of homes still commanding the full list price."
So, what does this all mean to homeowners and to potential buyers?
"Prices are still rising in nearly all markets across the country … and inventory is improving slightly, but not greatly so," Yun told CNBC.
"Homeowners are in a very comfortable position financially, in terms of their housing wealth," Yun said. He also said that homeowners are "absolutely not" in a recession.
For buyers, the slowdown in demand is generally good news, experts say.
"Buyers should expect a little better price negotiation possibility," Yun said. "Last year, they were at the mercy of whatever sellers were asking … and there were multiple offers. Buyers may not face that now."
While it depends on the specific market, there's more of a chance that buyers will see more normal buying experiences, experts say. In some places, the slowdown means less competition and more likelihood that sellers will accept offers that come with contingencies — such as the buyer must sell their own home first.
Whether the country is in an official recession or not, several experts believe the conditions could still be right in the coming months for homebuyers to act. Between lower mortgage rates and expected leveling out of home prices, prospective buyers may get some more bang for the buck in the next six to 12 months than what they've seen to this point in 2022, experts say.
Here are some things real estate experts expect to see happen during this housing recession:
Less competition: A recession often puts people in a difficult financial position, leaving them unable to afford a new home. This results in less competition within the market, for those who can still afford it.
Lower prices: With fewer buyers, home sellers will likely no longer see multiple offers or bidding wars for their properties. This can lead to lower home prices.
Lower rates: During a recession, the Federal Reserve will often lower interest rates to stimulate the economy, which can result in more favorable rates for borrowers getting mortgage loans.
Stricter lending requirements: To protect their profits during a recession, lenders may institute stricter requirements on mortgages to decrease the possibility of a borrower being unable to fulfill a loan.
Fewer options available: With less competition and lower prices, some sellers will take their home off the market or opt to wait it out, leaving less available inventory for buyers to choose from.
Economic uncertainty: Many people typically lose their jobs during a recession, and other conditions may cause people's finances to be less than stable as well. Liquidity can be important during a period of economic instability, and having your cash tied up in real estate may not be ideal.
The bottom line: Buying a home during a recession can be a good idea — but only for people who are lucky enough to remain financially stable. Mortgage rates may drop as the Fed tries to help the economy recover, and with fewer qualified buyers and less competition, home prices can drop as well. However, there are still plenty of risks during any economic downturn, particularly with the possibility of widespread layoffs. So if your finances are less than stellar, waiting it out may be the smarter move.
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