Is the Housing Market Signaling the Next Recession?
This Insight article explores how recent shifts in the housing market are emerging as a critical warning sign for the broader U.S. economy. As housing activity weakens, commercial real estate (CRE) professionals must pay close attention to its potential role in triggering the next recession.
Housing Market Now at the Center of Recession Concerns
While prior recession fears focused on trade wars or aggressive rate hikes, economists are now zeroing in on the housing market as the primary indicator of economic trouble. According to recent estimates from Moody’s and JP Morgan, the probability of a U.S. recession sits between 60% and 65%.
What’s Fueling the Decline?
Several interconnected factors are dragging down housing activity:
- Mortgage rates near 7% have crushed affordability.
- Residential investment is stagnant when adjusted for inflation.
- New housing permits are falling, indicating builder pessimism.
- Consumer sentiment is at historic lows—77% of Americans say it’s a bad time to buy a home (Fannie Mae).
Citi Research expects housing activity to shrink in Q2 2025, a development that often precedes broader economic contractions.
Commercial Real Estate Feeling the Pinch
The weakness in housing is bleeding into the commercial real estate sector. According to MSCI Real Assets, property values have dropped across all CRE sectors—the first time this has happened since 2010.
Multifamily Takes the Biggest Hit
Multifamily properties, once seen as recession-proof, are experiencing:
- A 12.1% year-over-year drop in valuations.
- Widening cap rate spreads, reflecting investor caution.
- Slowed transaction volumes and rising financing costs.
For CRE investors, these are red flags that call for revised expectations and more conservative strategies. Our article, How to Reposition a Commercial Property in a Down Market, explores exactly how to navigate such volatility.
The Fed’s Balancing Act
Despite signs of strain, the Federal Reserve remains cautious. While some economists at Citi argue that housing weakness alone won’t justify immediate rate cuts, a deepening downturn that impacts employment could force the Fed to pivot sooner than expected.
Real-World Example: The Dallas CRE Slowdown
Take Dallas, Texas—a metro that led the multifamily boom in 2023. Today, the tide has turned:
- New development land prices have dropped 20%.
- Concessions are rising as landlords scramble to fill units.
- Developers like Trammell Crow have paused several projects, waiting for greater market clarity.
This reversal is emblematic of the broader caution sweeping through CRE investment markets across the country.
What This Means for Investors and Developers
Whether you focus on housing or commercial real estate, it’s time to prioritize risk mitigation and strategic flexibility. Watch closely for:
- Declining asset values in key metro areas
- Shifts in policy that affect lending or development feasibility
- Changes in tenant demand, especially in office and multifamily sectors
Investors would be wise to re-evaluate their underwriting, stress-test scenarios, and prepare for potential credit tightening.
