In 2025, some economic forecasters have been bracing for trouble, as their outlooks darkened by a confluence of warning signs. Moody’s highlighted rising consumer delinquencies, declining corporate earnings and surging yields on the 10-year Treasury note as evidence that the economy was teetering toward a downturn.
By April, the specter of tariffs returned, stoking fears that inflation could reignite and tip the country into recession. Adam Posen, president of the Peterson Institute for International Economics and a former official at both the Federal Reserve and the Bank of England, estimated the odds of a recession at a daunting 65%, while J.P. Morgan’s forecast ranged between 50% and 60%, depending on the week.
Yet as concerns over tariffs and trade wars began to ease—thanks in part to a temporary truce between the U.S. and China—Wall Street’s attention shifted to a more insidious threat: housing. Despite President Trump’s efforts to cool trade tensions, analysts at Citi Research, as reported by Fortune, warned that the housing market now poses the greatest risk of sparking the next recession.
Recommended For You
Citi’s report invoked the late economist Ed Leamer, who famously argued that residential investment is the most reliable leading indicator of a looming recession. “We would be wise to heed his warning,” Citi cautioned, noting that housing activity is set to contract in the second quarter after only weak growth in the first.
The underlying data paint a troubling picture. Private residential fixed investment, while nominally up 1% from the prior quarter and 3% year-over-year, is flat once adjusted for inflation. Mortgage rates have climbed back toward 7% alongside rising Treasury yields, a level that Citi says is “too high to sustain an expansion” in housing.
The result is a market that is losing momentum. For example, permits for new single-family homes are declining, the supply of homes for sale is rising, even as demand remains tepid, and median prices for existing homes are falling on a monthly basis.
Consumer sentiment reflects this malaise. Fannie Mae’s April 2025 Home Purchase Sentiment Index showed that 77% of respondents believed it was a bad time to buy a home, with a net -55% rating on the buying conditions—an entrenched pessimism that has persisted for months.
In March, existing-home sales declined by nearly 6%, marking the largest monthly drop since late 2022, and year-over-year sales were down 2.4%. The inventory of unsold homes jumped 8.1% from February, signaling a market where supply is outpacing demand.
The commercial side of real estate is equally bleak. MSCI’s RCA Commercial Property Price Indexes recorded declines across all major U.S. property types, the first time since 2010 that every category saw simultaneous month-over-month and year-over-year price drops. Multifamily properties suffered the steepest fall, with values down 12.1% year-over-year and a 1.5% drop from March alone. While the pace of decline has slowed slightly, the trend remains negative.
Former BlackRock fund manager Edward Dowd has been among the most vocal in warning that housing is the fault line along which the next recession could erupt. He points to collapsing new home permits and falling rents as early indicators of a housing crash, exacerbated by government spending cuts and a slowdown in immigration that are sapping economic growth.
Dowd reminds that shelter accounts for about 45% of inflation calculations; should unemployment rise, downward pressure on rents will only intensify the drag on multifamily housing. “We’re not claiming anything’s going to go systemic,” Dowd said. “We’re not doom and gloom. It’s just we think it’s an old-fashioned deep recession and hopefully it’s quick.”
The Federal Reserve, for its part, is unlikely to intervene based solely on housing weakness. However, Citi notes that if the downturn in housing begins to spill over into the labor market, the central bank may be forced to accelerate rate cuts to cushion the blow.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
