Housing is in a recession.
That’s the verdict from housing experts tracking the steady decline in home sales, construction activity and affordability. However, unlike the 2008 crash, which was fueled by easy credit, subprime mortgages, and a lack of financial regulation, today’s downturn is discreet, marked by stalled mobility, cautious buyers and a market that’s frozen rather than falling.
Economists typically define a housing recession as a sustained decline across key indicators such as home sales, construction activity, affordability and housing-related employment. If several of these measures show negative growth for several months, the market is considered to be in a recession even if prices haven’t collapsed.
And recent housing data suggests the market is ticking those boxes.
Sales of previously owned homes, for example, are on pace for the worst year since 1995 — for the third year in a row.
Data from the National Association of Realtors showed that existing home sales in August slipped 0.2% to a seasonally adjusted annual rate of 4.0 million, marking the lowest monthly rate since June.
This slowdown reflects contracts signed at least one to two months earlier, when mortgage rates were hovering around 6.7% to 6.8%. Elevated borrowing costs continue to sideline potential buyers, while sellers, locked in a pandemic-era rate, are reluctant to list.
“The rate lock-in effect that we've been talking about for several years continues to hold back would-be sellers and slows the turnover of existing homes and, of course, prolongs the housing market’s slump,” Odeta Kushi, deputy chief economist at First American, told Homes.com.
The lock-in effect is compounding broader market inertia. With fewer homeowners listing their properties, inventory remains tight in many regions even as affordability keeps buyers on the sidelines. It’s not just mortgage rates holding people back. Americans remain stuck.
“Job hiring rate is quite low and job changes are often a trigger for a household move, so few people are switching jobs. There's less incentive to relocate, which reduces buyer and seller activity,” said Kushi.
The slowdown in mobility is rippling through the construction sector. Permits for future new homes, a gauge for building activity, fell 3.7% to an annualized pace of 1.3 million, reaching the lowest in five years, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development.
And it’s not just plans that are slowing down. The number of single-family homes under construction declined to the lowest annual pace since early 2021.
“My strongest conviction: housing is in recession, and this will bleed into residential construction employment,” Renaissance Macro head of economics Neil Dutta said in a note.
Construction companies have already pulled back on their staffing as global tariffs put pressure on businesses and immigration policies shrink the labor pool.
But Dutta warns that for every new housing permit, there are 2.5 construction workers on payroll. That’s the highest since 2012 and 10% higher than last year’s average. In simple terms, there are too many workers for too few homes.
To restore balance, he estimates that 304,000 construction jobs would need to be cut, which means 25,000 job losses per month. And since the U.S. is only adding around 30,000 private sector jobs per month, even a partial reduction would affect the broader labor market.
Meanwhile, pending home sales, which rose to a five-month high in August, offer a glimmer of activity but come with a caveat.
“There’s just a lot of volatility with these numbers and I don’t think you can put too much stock in anything that happens month to month,” Brian Bernard, Morningstar’s director of industrials equity research, told Homes.com. He noted that the recent slide in mortgage rates likely helped with the uptick in activity.
New Homes: A bright spot with limits
While the resale market stalls, homebuilders have been working harder to attract buyers.
“Builders have the ability to offer mortgage rate buy-downs and incentives, and that still means they’ll remain a relative bright spot,” said Kushi.
Builders continue to capitalize on the moment, leaning heavily on incentives to lure buyers back. In September, 39% of builders reported cutting prices, up from 37% in August, marking a post-pandemic high, according to the National Association of Home Builders.
From mortgage rate buydowns to price cuts and upgrades, builders are offering more than they have in years to move inventory.
The pricing gap between new and existing homes has narrowed. In fact, the median sales price of a new home in August was $413,500, lower than the $422,600 price tag on an existing home — a reversal of the long-standing premium associated with new construction.
While builders are trimming prices to move inventory, they haven’t collapsed. Overall, home price appreciation has slowed. In some markets, prices have even declined year-over-year.
These pricing dynamics vary widely by region. The slowdown is especially pronounced in Sun Belt markets, such as Florida and Texas, where inventory has surged and prices have begun to soften. In contrast, some Midwest and Northeast markets remain tighter, with more stable pricing and buyer demand.
Federal Reserve Governor Michelle Bowman warned that “in the current environment, declines in house prices could accelerate, posing downside risks to housing valuations, construction, and inflation.”
Even with aggressive incentives, signs of strain have started to emerge. Lennar, one of the largest U.S. builders, reported in its third-quarter earnings call that it was offering incentives worth 14.3% of its average sales price, levels not seen since 2009, according to John Burns Research and Consulting.
“Anytime you’ve got incentives on standing inventory at 10% or more, that’s not indicative of a strong market,” Rick Palacios, director of research at John Burns Real Estate Consulting, told Homes.com.
Despite these efforts, builders are pulling back as they struggle to offload much of their inventory. The number of unsold new homes remains high, averaging 497,000 in the three months to August — just shy of levels last seen during the late 2000s housing bust, according to Pantheon Macroeconomics.
Construction of single-family homes, which accounts for a bulk of homebuilding, tumbled 7% to an annualized rate of 890,000 — the lowest level in over a year.
“Builders are facing their own set of headwinds,” Kushi said. “They've got a lot of inventory on the market and now they're competing with an increase in existing home inventory.”
Palacios noted a new challenge: contingent buyers. Those who need to sell their current home before purchasing a new one. As resale activity slows, these buyers are increasingly unable to move forward, creating spillover effects in the new home market.
“Builders were doing really well in a 6–7% mortgage rate environment,” Palacios said. “But now that resale supply is unlocking and prices are flattening, it’s starting to leak into the homebuilding world.”
While incentives have helped maintain sales, margins are compressing, and companies like Lennar have signaled plans to slow their construction heading into 2026.
“Rather than step on the gas and add more supply into this market, let's slow things down,” Palacios added, referencing Lennar’s recent decision to pull back on starts. “The phrase [Lennar] used was, 'let's let the industry catch up.'”
Whether the market begins to thaw in 2026 or later will depend on how quickly mortgage rates ease, inventory rebalances and economic confidence returns.
The Federal Reserve’s path forward will be key. If rates ease gradually, housing activity could stabilize. But if inflation persists or labor weakens, the recovery may be delayed.
“I do think things will improve,” Jose Torres, senior economist at Interactive Brokers, told Homes.com. “Affordability is getting better, and I expect mortgage rates to settle around 6%. That should help bring transactions back — not just in the new home market but also existing.”