A hidden recession warning is lurking in the US housing market.
While fears of an imminent economic downturn have eased slightly as President Donald Trump has de-escalated his trade war, experts are sounding the alarm about a buried threat.
Economists have pointed to residential investment as a possible sore spot.
Residential investment involves spending on properties, such as single-family homes and condos, which are owned by landlords and rented out.
This includes new construction, renovation and refurbishment, and furniture and appliances bought by landlords to deck out homes.
The late economist Edward Leamer famously published a paper in 2007 – just before the financial crash – that said a dip in residential investment is the best indicator that a recession is looming.
Now economists are cautioning that it could be happening again.
‘We would be wise to heed his warning,’ analysts at Citi Research said in a note.
Austin has become ‘ground zero’ for the downturn of the once-booming property market in Texas
The late economist Edward Leamer famously published a paper in 2007 – just before the financial crash – which said that a dip in residential investment is the best indicator that a recession is looming
‘Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession,’ Leamer’s paper reads.
He pointed out that since World War II, there had been eight recessions preceded by substantial problems in housing.
‘A cooling housing market can be a drag on the overall economy,’ Kara Ng, senior economist at Zillow, told the Daily Mail.
‘Less housing market activity can impact employment in related sectors, thus pulling down economic growth.’
Analysts for Citi said housing activity looks set to contract in the second quarter of 2025 after ‘advancing only weakly’ in the first quarter.
According to the Federal Reserve Bank of St. Louis, private residential fixed investment, or RFI, in the first quarter of this year is up 1 percent from the fourth quarter of 2024.
When adjusted for inflation, that figure is flat compared not only to the previous quarter, but also the year prior.
‘Residential investment may stall or slow for a variety of reasons,’ Realtor.com Senior Economic Research Analyst Hannah Jones told the Daily Mail.
‘High housing costs have pushed many would-be buyers to the sidelines. A significant pullback in buyer demand puts less pressure on builders to construct new homes, and can lead to falling new construction activity.’
Climbing costs of construction materials, such as lumber and steel, or any shocks to labor supply can also make building new homes more expensive, said Jones.
This can result in less construction, or make landlords less likely to renovate their rentals.
‘Residential investment is a forward-looking indicator, as it involves investing now with the expectation that buyer demand will be sufficient to see a return in the future,’ she added.
‘Slowing investment could be the product of a less certain economic future, or a result of high interest rates, which hurt buyers and investors alike.’
While fears of an imminent economic downturn have eased slightly as President Donald Trump has de-escalated his trade war, experts are warning about a buried threat
Residential investment includes new construction, renovation and refurbishment, and furniture and appliances bought by landlords to deck out homes (Pictured: Construction in Austin, Texas)
‘Residential investment may stall or slow for a variety of reasons,’ Realtor.com Senior Economic Research Analyst Hannah Jones told the Daily Mail
Residential fixed investment is ‘the most interest rate sensitive sector in the economy and is now signaling that mortgage rates around 7 percent are too high to sustain an expansion,’ Citi analysts wrote.
The 30-year fixed-rate mortgage averaged 6.86 percent in the latest data from May 22, according to Freddie Mac.
Citi analysts also said a rise in longer-term Treasury yields would weigh on residential investment and the broader economy.
Mortgage rates have been creeping back up alongside yields for Treasury bonds, as the Federal Reserve has kept interest rates steady for successive meetings.
The Treasury bond market has been rattled in recent weeks due to Trump’s tariff threats and concerns over the effect of the administration’s sweeping tax bill on ballooning government debt.
US government bonds have traditionally been seen as one of the world’s safest assets, as well as a place where investors can park their money in times of volatility.
When investors grow uneasy and sell, this causes a surge in long-term Treasury yields, which move inversely to prices.
While the bond market may seem far removed for regular Americans, it can have an impact on mortgage rates.
Rates are closely linked to the yield on the 10-year US Treasury bond, though not directly tied.
A rise in Treasury yields means government borrowing costs will jump, which then tends to filter across and cause an increase in mortgage rates.
The central bank, meanwhile, has kept interest rates between 4.25 percent and 4.5 percent, and has signaled that it will not bow to pressure to cut them.
‘We don’t have to be in a hurry. The economy is resilient and doing fairly well,’ Fed Chair Jerome Powell said after the latest meeting earlier this month.
Citi analysts added that it will take more than weakness in the housing market to encourage the Fed to act.
‘The Federal Reserve will not respond to the housing market alone,’ they said.
‘But if signs emerge that the weakness in housing in spreading – particularly to the labor market – the housing contraction may have the Fed considering a faster pace of cuts.’
Though residential investment data can offer some insight into economic softening, it is not a sure indicator of a recession on its own, added Realtor.com’s Jones.
‘Easing residential investment coupled with significant softening in other measures of economic health could suggest weakness,’ she told the Daily Mail.
‘A cooling housing market can be a drag on the overall economy,’ said Kara Ng, senior economist at Zillow
Climbing costs of construction materials, such as lumber and steel, or any shocks to labor supply, can also make building new homes more expensive
Latest data from Realtor.com shows that housing inventory was up 30.6 percent year-over-year in April, home prices were flat, and the time homes spent on the market had expanded.
‘These dynamics suggest that the housing market is continuing to cool as would-be buyers wait for more favorable conditions before getting into the market,’ Jones said.
Separate data from Redfin forecasts that home prices will drop by 1 percent by the end of 2025, marking the end of more than a decade of almost uninterrupted price hikes.
Florida and Texas are already seeing their red-hot housing markets cool, thanks also to punishingly high insurance premiums due to a higher risk of natural disasters.
And the cracks are also beginning to show in other areas across the US, including North Carolina and Louisiana.
Despite this, some experts are more positive about the future of the housing market.
‘The spring home shopping season is off to a slow start, but activity could just be delayed,’ Zillow’s Ng told the Daily Mail.
‘Economic uncertainty prompted many buyers to pause their home searches, and as that uncertainty fades we expect to see a modest increase in sales.
‘Buyers who jump back in will find a friendlier market than in recent springs, with more options, more time to consider their options and more sellers cutting prices.’
