Goldman Sachs' Chief Economist Jan Hatzius has joined the chorus cautioning that falling residential investment during the second half of the year is set to undermine U.S. economic growth.
Hatzius expects residential investment, which includes spending on home construction and renovations, to decline by 8% year-over-year, highlighting affordability challenges and declining immigration as key contributors to continued weakness in the housing market. He also noted that the increasing use of mortgage buydowns to lower rates is further evidence that affordability remains a central issue for buyers.
Hatzius warned that slowing immigration, especially as the Trump administration intensifies efforts to curb illegal border crossings, is likely to restrict the formation of new households, which in turn dampens housing demand. Additionally, he pointed out that any weakness in the labor market—already suggested by recent underwhelming job data—could further pressure housing trends. His analysis projects that multifamily homebuilding will remain subdued through December and the pace of new single-family starts will contract.
Many other economists broadly share the view that weakness in the housing market could serve as a leading indicator of recession and may amplify economic headwinds. Mark Zandi, chief economist at Moody’s, has recently issued warnings about the broader ramifications of housing market instability. Persistent issues in both construction and sales, compounded by elevated mortgage rates, have left the sector vulnerable, he argued.
According to Zandi, unless mortgage rates fall significantly from their current near-7% levels, home sales, construction and prices are likely to deteriorate further, adding more strain to an already fragile economy. He has raised the probability of a U.S. recession within the next year, noting that a faltering housing sector could quickly become a “full-blown headwind” for growth, as housing activity typically has an outsized influence on consumer confidence, labor market trends, and related sectors of the economy.
Academic and historical analyses also emphasize the predictive role of residential investment. Economists frequently identify housing as a “quintessential leading indicator” of a recession. Declines in residential investment often precede broader downturns, given the sector’s connections to consumer spending, construction employment and demand for goods tied to home purchases.
For example, research by Citi and Pantheon Macroeconomics suggests that if home prices were to fall for a sustained period, it would likely trigger a drag on consumer spending substantial enough to make a recession a serious risk. Housing downturns tend to reduce not only realtor and builder activity but also demand for furniture, appliances and other home-related goods, creating a multiplier effect throughout the economy.
Past cycles reinforce this view. During the Great Recession, the collapse in the housing sector was central not only to the financial crisis but also to the subsequent contraction in broader economic activity, as residential investment peaked before the wider downturn unfolded.
More recent Federal Reserve and Congressional Research Service analyses indicate that persistent declines in residential investment are closely watched by economists as possible recession signals, especially after a string of consecutive quarterly declines.
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