Wharton professor Fernando Ferreira explained that he doesn’t think the housing market is in a recession in a recent Knowledge@Wharton article. So what story can we tell from the data we are seeing?

EconExtra is a series of posts that go beyond the textbook, relating current events and recent developments in economics to content standards, and providing resource suggestions to help you incorporate the current events into your lessons

The Headlines

Mortgage rates just surpassed 6%--double the rate from a year ago, and demand for mortgages has dropped 29% from last year (NYT). New home sales were down 30% year-over-year in July (CNN). Existing home sales were down for the 6^th consecutive month in July, and 20% year-over-year (National Association of Realtors). It sure seems like the housing market is in a recession. Let’s take a closer look.

What Happened?

Let’s look at the recent developments in the housing market.

• Mortgage rates hit record lows during the early days of the pandemic and stayed there for quite awhile.

• Demand for houses increased dramatically, as people looked for more space, different locations, and different kinds of housing to accommodate work-from-home and maybe multiple generations.

• Prices took off, which may have kept some out of the market, but with low interest rates, it didn’t have as big of an impact.

• Rising interest rates coupled with record prices have made buying a house out of reach for many.

• Housing sales have dropped over 25% in recent months, but will there be enough downward pressure on sales prices to offset the higher mortgage rates and pull more buyers into the active market?

This led Ferreira to describe the situation as a mismatch between supply and demand, particularly at the lower end of the distribution, not a recession. There is not enough affordable housing. (This is also true in the rental market.) Housing supply takes a long time to adjust, and housing starts have actually decreased, not increased. At the higher end, the impact appears to be less.

Lesson Ideas

1) For a brief introduction, or just a brief discussion of the issue you can try the NGPF Podcasts in the Classroom on just this subject.

2) Present the graphs from the Vox article. Have students try to explain what is going on from the graphs.

3) Then have students read both the Vox and the Knowledge@Wharton articles and use what they learn from them to support (or change) the explanation they came up with from just the graphs.

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.