Oxford Economics says the crumbling housing market will continue deteriorating because of two key factors
If you thought the housing market was bad enough: Buckle up.
Mortgage rates are still nearly 7% and home prices are 55% higher than they were at the beginning of 2020, according to the Case-Shiller U.S. National Home Price Index.
Housing inventory is slightly rising overall, but it's not doing so by nearly enough, a May report by the National Association of Realtors and Realtor.com shows. And an analyst note published this week by Oxford Economics said the housing market will continue to deteriorate this year.
'The supply of existing homes for sale is approaching pre-pandemic levels as a combination of high prices, elevated mortgage rates, and concerns over the labor market keep buyers sidelined,' Oxford Economics analyst Matthew Martin wrote in a note titled Recession Monitor – Real test for economy is just beginning. 'The new-home market is also being challenged, with builders continuing to offer incentives including price cuts in an effort to move unsold inventory.'
Oxford Economics researchers also noted sellers will have less ability to pass along price increases. In other words, sellers will keep pulling their homes off the market if they can't get a sale price they think they deserve.
Meanwhile, homebuilders will continue to face higher costs due to tariffs and a reduced labor force because of fewer immigrants and more deportations, according to Oxford Economics. This, in turn, will slow housing starts—a.k.a. new construction—which won't help inventory levels.
'A longstanding lack of inventory has supported both high prices and sluggish sales in the market for existing homes,' Daiwa Capital Markets analysts Lawrence Werther and Brendan Stuart wrote in a note published Wednesday. 'Substantial improvement is unlikely to materialize in the near term until mortgage rates (and/or prices) ease, thereby mitigating the current affordability challenges faced by potential buyers.'
Affordability is also hurting builders, who have had to continue offering incentives and price cuts.
'Multiple years of undersupply are driving the record high home price. Home construction continues to lag population growth,' Lawrence Yun, chief economist for the National Association of Realtors, said in a statement. 'This is holding back first-time home buyers from entering the market.'
'We still don't have an abundance of homes that are affordable to low- and moderate-income households, and the progress that we've seen is not happening everywhere,' Realtor.com Chief Economist Danielle Hale said in a statement. 'It's been concentrated in the Midwest and the South.'
However, that leads to one small silver lining predicted by Oxford Economics. Due to labor-market concerns and weak demand (thanks to currently high home prices and mortgage rates), they predict home price growth will slow and builders will limit new-home construction.
'Slower home price growth may provide a floor beneath sales,' Martin wrote, but 'household appetites for spending will largely hinge on the health of the labor market.'
Despite a struggling housing market, Oxford Economics predicts the U.S. will avoid a recession this year and the Federal Reserve will start to 'cut rates aggressively' at the beginning of 2026.
This story was originally featured on Fortune.com
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