The media and economic analysts are treating widening woes of the real estate market as if they were all separate issues, unrelated to the larger economy. iStock illustration

On paper, the economy couldn’t look finer.

The jobless rate remains below 4 percent, inflation is almost back to normal, and GDP growth weighed in at a phenomenal 4.9 percent in the third quarter.

The media is filled with stories wondering why voters haven’t figured out how great they have it and the wonders of Fed Chair Jerome Powell’s seemingly successful campaign to engineer a “soft landing” for the economy in his battle to subdue inflation.

Amazingly, little if any attention is paid to the iceberg looming ahead – the massive and growing real estate slump, from the plunge in home sales to the cratering of downtown business districts and the cancellation or indefinite postponement of projects ranging from new labs to apartment buildings.

It’s not that reporters aren’t writing, and economists and other experts aren’t commenting on each of these issues. Rather, the widening woes of the real estate market, including layoffs in the construction industry, are being covered and written about as if they were all separate issues, unrelated to the larger economy.

Yes, there was a brief period in 2022 when a few publications, like Fortune, ran stories tying a housing downturn to a potential recession in 2023.

But when the economy not only kept moving forward in 2023, but did even better than expected in the teeth of the Fed’s rate-hike campaign, stories about a potential recession faded, including any examination of whether a hurting real estate market could drag everything else down with it.

Yet real estate downturns have preceded some of our most serious recessions for decades now, and, more often than not, there has been strong evidence of causation, not just simple correlation.

History’s Solid Track Record

The Great Recession of 2008 is the classic example of real estate taking everything else down with it as the housing bubble of the mid-2000s burst, threatening the stability of the banking system and eventually triggering global financial crisis.

The early 1990s recession, which hit New England with the force of a mini-Great Depression, also had a major tie-in with events in the real estate market. The double-whammy of a collapse in home prices and a surge in failed office and commercial projects took down some of the region’s most venerable banks.

Fast-forward to the start of 2024, where have the worst of both worlds when it comes to real estate, with home sales dead in the water and office buildings in downtowns from Boston to San Francisco worth just a fraction of what they were a few years ago.

Ideas for new project proposals, from apartment buildings to lab complexes, are dead in the water, unable to move forward.

On top of that, new construction of apartment, condominium, lab and office projects has plunged.

(sub)The Economic Hits are Real

If anything, all of these trends are likely to get worse in 2024.

A decline in home prices may be the next shoe to drop, with a protracted period of falling sales often leading to a decline in values.

Battered downtown business districts are also likely to see more buildings sold off at deep discounts or even foreclosed on. In addition, as the dramatic drop in market and assessed values of once-pricey buildings makes its way into the municipal ledger books, we may also start to see a fall in local tax revenues, triggering potential cuts in city services and staff.

Construction is poised to take an even bigger hit as work, especially in the Boston area, as work from the tail end of the building boom wraps up and contractors find themselves without any new projects to keep their workers gainfully employed.

In fact, there are already rumblings of layoffs at a number of local construction firms as contractors look ahead to a lean 2024.

Scott Van Voorhis

Why No Recession Yet?

Still, the question remains: Why we aren’t any major impact on the economy from all this bad real estate news?

After all, maybe there truly is a disconnect this time between what feels like a full-blown real estate recession and a still-booming economy.

While forecasting that home sales will continue to remain stuck in the mud at the national level, economists at Freddie Mac are predicting nothing more than a slowing in 2024 of the brisk growth America saw in 2023, with a small increase in unemployment.

A more likely explanation, though, is that real estate is a lagging indicator, and that it takes time for the sector’s slowdown to impact other parts of the economy.

It took something like 18 months or more, back in the mid-2000s, after sales began to fall for home prices in Massachusetts to start declining as well. And roughly three years separated the start of the real estate downturn in 2005, as sales started to fall, with the global financial crisis and the start of the Great Recession in the fall of 2008.

Here’s hoping we do dodge the bullet – recessions stink. But it’s far too early to declare victory, and, if present trends continue in the real estate market, it’s hard to see how we escape at least some economic turbulence down the line.

Scott Van Voorhis is Banker & Tradesman’s columnist and publisher of the Contrarian Boston newsletter; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.