The latest warnings from Moody’s Analytics Chief Economist Mark Zandi have cast a shadow over the trajectory of the U.S. housing market, signaling growing risks that may soon ripple through the broader economy. As mortgage rates hover around 7%, the housing sector is facing slumping demand, subdued homebuilding activity, and stubborn affordability issues that seem poised to intensify.
Zandi, who recently escalated his outlook from a “yellow flare” to a more urgent “red flare,” points to persistently high mortgage rates as a primary culprit behind the sector’s doldrums. While rates at these levels might not be extraordinary by historical standards, they compound the burden of today’s high home prices. This toxic combination is making home purchases unfeasible for a significant number of Americans, with home sales and new construction volumes both falling sharply. Census data shows not only a 13.7% monthly drop in new single-family home sales, but also a notable chill in building permits and housing starts.
Homebuilders—previously able to maintain activity by offering rate buydowns—are now retreating, finding such incentives increasingly unsustainable as borrowing costs rise. Many builders are delaying land purchases and scaling back new projects, suggesting that homebuilding will slow even further in the coming months. Home prices, remarkably resilient in the early phase of higher rates, have begun to go sideways or even dip. Market watchers note that house price indices, such as the Case-Shiller, recently recorded consecutive monthly declines, while a growing share of builders and sellers are making price cuts to attract reluctant buyers.
Further compounding the problem is the growing disparity between those locked into lower pre-pandemic mortgage rates and prospective buyers contending with today’s elevated borrowing costs. While many homeowners have delayed moves or listing properties to avoid higher monthly payments, life changes are eventually forcing more of these “locked-in” owners to sell, swelling the supply of listings. Yet, demand remains tepid as buyers struggle with eroded affordability and tough credit conditions.
The broader economic implications are becoming harder to ignore. Zandi cautions that housing—a pillar of American economic growth and a key driver of employment, construction, lending, and consumer spending—is on the cusp of transforming from a worry to a tangible headwind. The knock-on effects could drag down overall GDP, especially as pressures mount from weaker consumer spending, inflation, labor market softening, and policy uncertainty.
With analysts and historical studies highlighting housing as an early warning indicator for oncoming recessions, these red flags are prompting deeper concern about the economic outlook for late 2025 and into 2026. Unless mortgage rates retreat meaningfully—an outcome experts see as unlikely in the near term—the housing sector appears set to remain a drag on economic activity, challenging policymakers and consumers alike in the months ahead.
