Housing Market Flashes Warning of an Upcoming Recession
Fears of a U.S. recession have temporarily eased following President Donald Trump’s move to scale back his trade war with China. But according to analysts at Citi Research, other significant threats persist. In a Friday note, Citi cautioned, “Housing activity looks set to contract in Q2 after advancing only weakly in Q1. The rise in longer-term Treasury yields will weigh on residential investment and the broader economy.”
Referencing economist Ed Leamer, who famously argued that residential investment is the best leading indicator of an oncoming recession, Citi warned, “We would be wise to heed his warning.”
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Investment Stalls Under Rising Rates
Official figures show that private residential fixed investment reached a seasonally adjusted annual rate of $1.22 trillion in Q1—up just 1% from the previous quarter and 3% year-over-year. But once inflation is accounted for, “investment is flat from the prior quarter and from a year earlier.”
As 30-year mortgage rates approach 7%, driven by rising Treasury yields and inflation forecasts burdened by tariffs, the housing market appears increasingly fragile. Citi emphasized, “Residential fixed investment is the most interest rate sensitive sector in the economy and is now signaling that mortgage rates around 7% are too high to sustain an expansion.”
Alarming Indicators: Permits Down, Supply Up, Prices Falling
Other housing data bolster Citi’s warning. The note points to a “decline in permits for single-family home construction and an increase in the effective supply of homes on the market amid weak demand, even during the peak spring selling season.”
Moreover, median home prices are slipping on a monthly basis. According to Realtor.com, the national median list price fell 1.1% year-over-year, while listings surged 8.2%, revealing a struggle among sellers to attract buyers.
While price cuts and incentives drove an unexpected surge in new home sales in April, Citi noted that “sales for the first four months of 2025 are down 1.2% from the same period a year ago.”
The bank concluded, “The Federal Reserve will not respond to the housing market alone. But if signs emerge that the weakness in housing is spreading – particularly to the labor market – the housing contraction may have the Fed considering a faster pace of cuts.”
JPMorgan Reassesses Recession Risk After Tariff Relief
Meanwhile, JPMorgan has lowered its recession odds following President Trump’s temporary deal to ease tariffs on China. The bank said in a Tuesday note that the pause, which reduced tariffs from 145% to 30% for three months, has “dropped the odds of a recession significantly.” According to Chief U.S. Economist Michael Feroli, “We believe recession risks are still elevated, but now below 50%.”
Previously, the bank forecasted a 60% chance of recession in 2025, a view it now calls premature. The new projection anticipates U.S. economic growth at 0.6% in 2025, up from the previous 0.2%. Feroli also revised inflation expectations downward, saying the core personal consumption expenditures index would rise “to 3.5% from 4%, previously.”
The easing of trade tensions has already buoyed markets. Following the announcement, the Nasdaq jumped 4%, launching a new bull market, while the S&P 500 and the Dow climbed 3.3% and 2.8%, respectively.
A Delicate Pause with Uncertain Aftermath
The 90-day tariff reprieve may buy time for negotiations, but Trump warned that tariffs could “surpass 30%” if talks fail, though he assured they wouldn’t return to the previous 145% level. At a White House press event, he said, “They’ve agreed to open China, fully open China. And I think it’s going to be fantastic for China. I think it’s going to be fantastic for us.”
Still, JPMorgan remains cautious. “We still project a modest contraction in employment later this year, as labor demand is projected to slow even more than labor supply,” the note said. As a result, the bank is now delaying its prediction for Fed rate cuts from September to December.
Sources: Citi Research note (Friday); JPMorgan Chase note (Tuesday); Realtor.com housing data.