Hi! I’m Aziz. My newsletter contextualizes economic news using data visualization. These days I’m focusing on housing—hit reply and let me know what you think.

Mortgage rates are much higher, and home prices have barely fallen. As a result, affordability has tanked, and home sales have plunged. From the peak in late 2020 to the trough in January this year, the monthly pace of home sales declined by 42%. By this metric, we just experienced the fastest decline in the housing market on record.

American home prices peaked a year ago and have since fallen by a mere 4%. With mortgages rates so much higher, shouldn’t prices have fallen more?

The historical data suggests that, in focusing on prices, we might be looking in the wrong place. The closest analogue to what we are seeing today was the late ‘70s and early ‘80s, when high inflation prompted the Fed to drastically tighten monetary policy. Back then, the housing market didn’t adjust through prices (which moved sideways), but through sales (which plunged).

This is what we are again seeing today. At the market bottom earlier this year, the number of homes sold was 42% lower than at the market peak in late 2020—an epic reduction in activity that ranks just below the downturns in 1978-82 and 2005-10. And because the housing market froze so quickly, with home sales declining at a pace of 1.5% per month, it has been the steepest downturn on record.

Activity has picked up since then, but not by much—in the latest reading, sales were 0.3 million units above the January trough, but still 2.5 million below the Oct 2020 peak.

Looking ahead

If the late ‘70s mirror what is happening today, what can that era tell us about what lies ahead?

Much like today, inflation was stubborn back then, prompting the Fed to embarrassingly backtrack on policy easing three times (summer 1980, spring 1981, December 1981) before finally taming inflation sufficiently to embark on a lasting reduction in policy rates in the spring of 1982. Housing activity stabilized that summer and home sales were surging by the fall.

Bond markets anticipate the Fed cutting rates before year end. In this “optimistic” scenario (quotes because this would almost certainly entail a substantial economic slowdown, too), and assuming the marginal driver of housing activity is interest rates not growth, home sales will meaningfully restart late this year or in early 2024.

But there are some unusually large risks to this view. For one, inflation has persistently proved more stubborn than many (including me) expected. And the weaker economic conditions that would motivate looser policy could offset a lot of the stimulatory effect of lower rates.

There is also a “muddling through” scenario. Housing watchers tend toward the binary in their forecasts, but following the great financial crisis, home sales hovered around 5 million units per month, without much directionality, for 12 years. This outcome seems at least as plausible as any other.