The likelihood of a recession in the near future is on the decline and is likely to drop further as the year ends, according to the latest BuildFax Housing Health Report. The chance of a recession stands at about 42%, according to BuildFax.
BuildFax’s recession probability estimate started the year at 29% and then rose sharply to nearly 50% by September. Now it is on the decline. According to BuildFax, the time to “raise red flags” is when the likelihood reaches about 60%.
September’s heightened probability was due to “a culmination of sluggish housing activity, global tensions, and turbulence in the U.S. stock market,” according to BuildFax, which bases its probability on 14 factors, including single-family housing authorizations, AAA corporate bond yield, average hourly construction earnings, average hourly manufacturing earnings, average manufacturing hours worked, personal income, employment levels, and more.
“The probability is expected to decline even further by the end of the fourth quarter as long as economic conditions remain favorable,” BuildFax stated in its report.
One of the most important factors in BuildFax’s predictions is single-family housing authorizations, which BuildFax labeled “one of the most predictive factors” in housing recessions that occurred between 1961 and 2008.
BuildFax’s recession probability indicator has followed housing activity throughout the year—falling through most of this year and picking up in the past few months.
Moving forward, Jonathan Kanarek, Managing Director at BuildFax, said single-family authorizations are “a must-watch indicator” for the market.
Single-family housing authorizations showed some positive movement in November for the second time following 11 months of decline. Authorizations for single-family housing rose 1.16% over the month in November and posted a substantial 7.09% gain over the year.
BuildFax also tracks a trailing three-month average, which was 4.99% for the three months ending in November.
Existing maintenance volume increased 7.26% over the year, and remodeling volume rose 4.60% over the year. Increases in maintenance and remodeling often accompany home purchases and sales, according to BuildFax.
“Housing activity is seemingly on its way to a stabilization, as new and existing construction both saw increases this month,” Kanarek said. “However, declining single-family housing authorizations in 2019 have led to an increasingly dwindling housing supply.”
The damper on housing supply could have implications on prices in the new year, Kanarek noted, saying that the market will have to “grapple with the lingering effects of the 2019 slowdown.”
Overall though, Kanarek reported that BuildFax is “cautiously optimistic that continued increases in housing activity into 2020 will alleviate some of the economic uncertainty that the country has felt throughout this past year.”